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Five Golden Rules For Investing In Stocks

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Five Golden Rules For Investing In Stocks
Sunil Damania - 18 February 2020

Over the years experts have suggested many rules for investing in the stock market. Based on my 30 years of experience, here are five golden rules that will help you to navigate volatility in the stock market in a much better manner.

Bet on management

According to the first principle, one should always bet on good quality management. Historically, there is a strong correlation between better-managed companies offering better equity returns. This is also true vice versa. Good management knows how to navigate bad times and when the situation turns, they lead from the front. If you wish to apply only one parameter for choosing a company then, choose the quality of management over any other parameters. Good management creates a good franchise that makes business more robust and lends longevity. A few examples of good quality management that created good franchises are HDFC, Hindustan Unilever, Bajaj Finance and Asian Paints.

Restrict the maximum number of stocks to 15 to 20

Investors normally own too many stocks in their portfolio resulting in sub-optimal returns. Ideally, an investor should own a maximum of 15 companies (at a stretch 20 companies) in the portfolio. Spreading too thin is a perfect recipe for underperformance.

Have a long-term view but the review must be periodically

The stock market is not a T20 game nor a one-day cricket match. It is more like a five-day match where patience is the key. We know many investors who sold quality stocks too early like Asian Paints, Bajaj Finance, HDFC Bank and HDFC. The worst is that they entered not so prominent companies after selling quality stocks. It is like selling gold to buy copper.

Many investors borrow money to invest in the stock market. This is suicidal. The borrowed money will never allow you to have a long-term view of the market. Invest in the stock market with your own money. When it comes to Future and Options it is strictly a no go area, even with your own money. F&O is a weapon of mass destruction.

But despite having a long-term view, we suggest monitoring the portfolio in a periodic manner. This will ensure that you do not miss out on an opportunity to book profits if there is a fundamental shift in the company’s DNA or industry scenario.

You will make mistakes, but never lose heart

No investor in the world can claim that he or she hasn’t made mistakes in the market. So, if you make a mistake, don’t lose heart. Consider it as a part of your learning cycle. The most successful investors are those who make lesser mistakes as compared to others. The key here is to learn from your mistakes.

Keep returns expectation reasonable

The stock market is not the place where one can double money in the short term. Despite its best performing asset class in the long run, equity on an average has given 14-15 per cent annual returns to investors. Reasonable return expectations will help you to keep sanity while investing. One should also remember that returns are not linear. There will be few years wherein you would have either zero or negative returns. But if you have invested in good quality companies with a long term horizon, one can look at 14 to 15 per cent annual returns from the market.

I am sure if you apply these five golden rules your probability of making money from equity increases manifolds.

The author is the Chief Investment Officer of MarketsMojo.com

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