YOUR GUIDE TO SUCCESS IN STOCKS
Even
first-time investors can be successful if they are disciplined and follow these
rules diligently.
If you wish to invest in the stock markets and know nothing about them, one convenient way is to opt for mutual funds. If you are keen on investing directly, then do allocate the necessary time, energy and resources.
Show commitment
First, spend time on understanding a company’s fundamentals: sales, net profit, margins, etc (see box). Also study speculative markets, because sentiments play a major part in driving stock prices. Sentiments in turn are driven by expectations of what will happen in the future.
Have a long-term horizon
Like a company shareholder, give your investments time to grow. Enter the markets with realistic return expectations, and not outrageous ones. Remember that time is the best antidote to risk: the longer your investment horizon, the lower the volatility of returns.
Keep emotions in check
Do not turn euphoric when the markets surge, nor become despondent when they plumb new lows. Even if you develop a well-researched, diversified portfolio and hold it for the long term, inevitably some of your stock holdings will turn out to be duds. When that happens, respond based on your training and intellect, rather emotionally (see graphic).
Be prepared to interpret data
While institutional investors have access to expensive databases, you will have to depend on publicly-available information. Quarterly results, annual reports, and shareholding pattern are available on NSE and BSE’s web sites. Scout for more information in the media, and on Google Finance and Yahoo Finance. Technical market data like share prices and volumes is available on company web sites, and old research reports on brokerage houses’ sites.
Analyse,
then buy
Analyse the company with the same level of rigour as you would if you were the owner. Initially stick to sectors that you know best. Doctors, for instance, should invest in pharma companies first. Compare a company’s ratios with the index and industry historical averages (see 10 ratios for stock picking). Look for the following ratiobased characteristics in a stock you are keen on: low PE, low PB, high dividend yield, low debt to equity ratio, and high RoCE and high RoNW.
Buy, monitor, sell
Since monitoring many stocks becomes difficult, stick to 15 or 20. If derived from diverse sectors, that many stocks offer adequate diversification. Monitor your stocks’ fundamentals and valuations at least once every quarter. Sell only to meet a financial obligation, to rebalance, when fundamentals deteriorate, or when the stock becomes overvalued. Also, sell if you can replace one with a better option. Adhere to these basics and you could well surprise yourself with your performance.
Analyse the company with the same level of rigour as you would if you were the owner. Initially stick to sectors that you know best. Doctors, for instance, should invest in pharma companies first. Compare a company’s ratios with the index and industry historical averages (see 10 ratios for stock picking). Look for the following ratiobased characteristics in a stock you are keen on: low PE, low PB, high dividend yield, low debt to equity ratio, and high RoCE and high RoNW.
Buy, monitor, sell
Since monitoring many stocks becomes difficult, stick to 15 or 20. If derived from diverse sectors, that many stocks offer adequate diversification. Monitor your stocks’ fundamentals and valuations at least once every quarter. Sell only to meet a financial obligation, to rebalance, when fundamentals deteriorate, or when the stock becomes overvalued. Also, sell if you can replace one with a better option. Adhere to these basics and you could well surprise yourself with your performance.
ETW 131209
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