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TIMELES TIPS |
Tips for Successful Investing
Investing in equities is nothing but common sense & there is no rule without an
exception, there are some principles which are tough to dispute. These rules will
perhaps lead you to how stock market should be approached from a long-term view.
Focus on the future: The tough part about investing is that we
are trying to make informed decisions based on things that are yet to happen. It's
important to keep in mind that even though we use past data as an indication of
things to come, it's what happens in the future that matters most.
Be open-minded when selecting companies: Many great companies are
household names, but many good investments are not household names (and vice versa).
Thousands of smaller companies have the potential to turn into the large blue chips
of tomorrow. In fact, historically, small-caps have had greater returns than large-caps.
This does not imply that you should devote your entire portfolio to small-cap stocks.
Rather, understand that there are many great companies & opportunities, and that
by neglecting all these lesser-known companies, you could also be neglecting some
of the biggest gains.
Don't chase the "hot tip": No one can ever guarantee what a stock
will do. When you make an investment, it's important you know the reasons for doing
so. Do your own research and analysis of any company before you even consider investing
your hard earned money. Relying on a tidbit of information from someone else is
not only an attempt at taking the easy way out, it's also a type of gambling. Sure,
with some luck, tips may sometimes pan out. But they will never make you an informed
investor, which is what you need to be to be successful in the long run.
Pick a strategy and stick with it: Different people use different
methods to pick & exit stocks. There are many ways to be successful and no one strategy
is inherently better than any other. However, once you find your style, stick with
it. An investor who flounders between different stock-picking strategies will probably
experience the worst, rather than the best, of each. Constantly switching strategies
effectively makes you a market timer, and this is definitely territory most investors
should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s
as an example. Buffett's value-oriented strategy had worked for him for decades,
and - despite criticism from the media - it prevented him from getting sucked into
tech startups that had no earnings and eventually crashed.
Penny stocks…. The Killer: Resist the lure of penny stocks. A common
misconception is that there is less to lose in buying a low-priced stock. But whether
you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same,
either way you'd still have a 100% loss of your initial investment. A lousy Rs.
5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny
stock is probably riskier than a company with a higher share price, which would
have more regulations placed on it.
Sell the losers and let the winners ride: Time and time again,
investors take profits by selling their appreciated investments, but they hold onto
stocks that have declined in hopes of a rebound. If an investor doesn't know when
it's time to let go of hopeless stocks, he or she can, in the worst-case scenario,
see the stock sink to the point where it is almost worthless. Of course, the idea
of holding onto high-quality investments while selling the poor ones is great in
theory, but hard to put into practice. The following information might help:
- Riding a Winner - Don't underestimate a stock that is
performing well by sticking to some rigid personal rule - if you don't have a good
understanding of the potential of your investments, your personal rules may end
up being arbitrary and too limiting. No one in the history of investing with a "sell-after-I-have-tripled-my-money"
mentality has ever had a tenbagger.
- Selling a Loser
- There is no guarantee that a stock will bounce back after a protracted decline.
While it's important not to underestimate good stocks, it's equally important to
be realistic about investments that are performing badly. Recognizing your losers
is hard because it's also an acknowledgment of your mistake. But it's important
to be honest when you realize that a stock is not performing as well as you expected
it to. Don't be afraid to swallow your pride and move on before your losses become
even greater!
In the above said cases, the point is to judge companies on their merits according
to your research. In each situation, you still have to decide whether a price justifies
future potential. Just remember not to let your fears limit your returns or inflate
your losses.
Don't sweat the small stuff: Importance of realizing when your
investments are not performing as you expected them to - but remember to expect
short-term fluctuations. As a long-term investor, you shouldn't panic when your
investments experience short-term movements. When tracking the activities of your
investments, you should look at the broader picture. Remember to be confident in
the quality of your investments rather than nervous about the inevitable volatility
of the short term. Also, don't overemphasize the few cents difference you might
save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations
as a way to make gains. But the gains of a long-term investor come from a completely
different market movement - the one that occurs over many years - so keep your focus
on developing your overall investment philosophy by educating yourself.
Do not overemphasize the P/E ratio: Investors often place too much
importance on the P/E ratio. Because it is one key tool among many, using only this
ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio
must be interpreted within a context, and it should be used in conjunction with
other analytical processes. So, a low P/E ratio doesn't necessarily mean a security
is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Investors adopt a long-term perspective: Large short-term profits
can often entice those who are new to the market. But adopting a long-term horizon
and dismissing the "get in, get out and make a killing" mentality is a must for
any investor. This doesn't mean that it's impossible to make money by actively trading
in the short term. But, as we already mentioned, investing and trading are very
different ways of making gains from the market. Trading involves very different
risks that buy-and-hold investors don't experience. As such, active trading requires
certain specialized skills.
Neither investing style is necessarily better than the other - both have their pros
and cons. But active trading can be wrong for someone without the appropriate time,
financial resources, education and desire.
Taxes are important, but not that important: Putting taxes above
all else is a dangerous strategy, as it can often cause investors to make poor,
misguided decisions. Yes, tax implications are important, but they are a secondary
concern. The primary goals in investing are to grow and secure your money. You should
always attempt to minimize the amount of tax you pay and maximize your after-tax
return, but the situations are rare where you'll want to put tax considerations
above all else when making an investment decision
Conclusion
However, we feel that these common sense principles will benefit and provide you
some insight into how you should perceive investing in equities.
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