Stocks And The Art Of Money Making

Here are some thumb rules you can't afford to ignore if you want to be a successful investor

Through the past twenty years that I have been associated with the markets, I have been in constant pursuit of a good investment strategy. I have realised that, to create wealth in the stock markets, one needs to be humble. Humble to the extent of learning from anybody.

Through my readings of various books written by gurus such as Buffet, Graham, Smith, Train, among others, I have learnt about the wisdom of investments. Many theories have come and gone but a few investment rules have remained from time immemorial and I would like to share a few of them with you.

 

Don't make hasty and emotional decisions. These decisions, which are based in sync with the crowd, are often wrong. Resist this 'SALE' temptation. Investors must distinguish between buying stocks and buying clothes in 'discount' stores.

In discount stores, you need to grab so as to lay your hands on the best stuff. But stock markets work on the contrary. It makes a lot of sense to pull yourself back and withhold buying.

History has time and again proved that the masses are not well informed. Masses are undisciplined, are unable to make the right choices at the right price. Masses are very much like cattle, identifying leaders they can follow.

The masses are known to get over optimistic in bullish times and get extremely panicky in the bearish times. In good (read bull) times, even negative news about companies is shunned.

Never sell great companies. Very often when investors meet disappointment, they come to us with their portfolios. Our past experience shows that investors are very hesitant to sell their stocks at a loss.

They would prefer to sell off top quality stock at a profit but would not, at any cost get rid of 'junk' stocks. When we sell top quality stocks, we only convert our asset from one type to another. On the other hand, it makes no sense to hold on companies that have no future and it is best to sell them.

Don't get married to your stocks. At the end of the day, we must know what price we are paying for the stock. If you have committed a mistake accept it. Don't double it by 'averaging'. Averaging is fine as far as good companies are concerned but could prove lethal if you are stuck in junk stocks.

Running away from reality will not do any good. Even the greatest investors through the years have made dud investments. Committing a mistake is not the sin. Accept your mistakes, you will come out a winner.

Red-hot tips. Investors today want quick money. Tipsters very well cater to this demand. After taking a position in a particular stock, the rumour mongers start churning out different 'growth' stories about the company.

Surprisingly even the pink papers have easily given in to some baseless stories in the past. It is here that investors need to keep in mind, their LoR. LoR (level of receiving) is nothing but analysing your position in the information ladder. Example, the managing director, chairman would be say at Level 1. Insiders, auditors and the likes would be at Level 2. Some analyst tracking the company from close quarters would be at say Level 3. So on and so forth.

With others players in between, the lay investors is the last one to get this so-called 'tip'. By the time the small investor is buying, the operator has already made a killing.

We spend hours researching a particular stock to convince our clients why we bought a particular stock. On the other hand, the very same investor puts in thousands of rupees on tips -- without asking even a single question. Don't be a victim. Stay away from short-term tips.

Go for quality and not for quantity.

Investors around the globe including those in India love buying quantity, little emphasising on quality. Investors love buying 1000 shares of 'also ran' at say Rs 4 each over just 5 shares of a quality company at Rs 800. Note that the outflow is Rs 4000 in both the cases. Please remember dirt is available cheap, whereas as gold is expensive.

It is far better to buy great stocks at expensive prices than purchase dirt-cheap stocks at low prices. We need to realise that a particular share is going dirt-cheap only because it is just that - dirt.

Highs and lows. Every investor wants to buy at the lowest price and sell at the highest price. This is just not possible. Even gurus have failed to time the markets. If technical analysts could predict the markets, why would they work for others? Wouldn't they make money for themselves? Nobody in the past has been able to time the market; nobody would be able to do so in the future.

If ever you manage to buy at the bottom and sell at the peak, accept it as a matter of chance. The idea is to buy good companies at reasonable values and not get into the 'timing' game. Focus on the forest, not trees. Remember if one waits for the bottom, the opportunity could be missed for a lifetime.

Don't expect companies to rise as soon as you have invested. If you have invested in good companies, the markets will sooner than later realize it. The markets have always behaved intelligently in the long term; it is only in the short term that it gets a little crazy.

Just as I approach the end of this piece, I realise how difficult it is to follow these rules. Considering the amount of information exchange that is happening today, it is all the more difficult to avoid any constant 'action'. Investors must realise: there are no shortcuts to making money.