Stock markets are the barometer of the financial health of a country, and the mother of many asset classes
Equity is one of the primary investment tools among the Asset classes. I call investing in equity a game because it has inbuilt all the elements of a game/ sport involving an equal chance of winning or losing, where while a right move leads to a win and wrong one leads to defeat and pain. Therefore, proper planning and strategy hold the key to success.
The field for the game of equity is the stock market. The stock markets are regarded as the barometer of the financial health of a country, and the mother of many other asset classes such as mutual funds, debt funds, property, business classes including finances and industry, etc.
Investment in equity is intuitive and judgmental picking of stocks based on information, facts, and figures about a Company, and performance and promise of its products for the future. In other words, stock markets are forward-looking in the future more than in the present. Therefore, picking the right stock and its value proposition in the foreseeable future rests on the judgment of the things likely to happen with the particular stock, its convivial sector, and likely market scenario in the near future!
However, it is common knowledge that based on a common pool of information and facts on a particular moment different people arrive at different judgment and conclusions depending upon one’s ability and analysis. The proof of this could easily be seen in the different opinions expressed by different stock market experts during a debate for the same stock. Even different financial institutions express a different view on a particular share! That is why I say that stock markets are intuitive and judgemental, depending upon one’s ability and expertise, with equal chances to win or lose!
Nevertheless, with patience and a little bit of knowledge-based research, devoid of greed, investment in equities, may be regarded as a nice way of wealth creation.
The basic approach to investment in shares
At the very outset, I would like to shun a misconception prevailing in some quarters that investment in shares is akin to gambling. It may be partly true in the case of futures and options. One may deal in shares as an investor or a trader. Therefore, a basic prerequisite for playing in the stock market is to be sure to recognise yourself as an Investor or a Trader! A trader may be a day trader, regular trader, or a trader in the future and options. Out of these, trading in any form, especially in futures and options, is quite akin to speculation (say like gambling) and highly risky, and only a trained and skilled trader might make a profit. Day trading or trading in Futures and Options is a different ball game altogether, requiring a different skill set than investing. Nevertheless, a general understanding and belief of experts are that in trading, especially in future and options trading, almost eighty per cent of people suffer losses. In trading, especially in future and options, the element of speculation, as also the risk to gain ratio is high akin to gambling. However, investing with a long-term, 2-3 years perspective, most often proves rewarding, notwithstanding that some risk is always there, depending upon market and financial situation within and outside the country. Thus, to invest with due diligence, understanding (based on some research), patience and confidence, is sure to prove rewarding, with average returns definitely better than bank Fixed Deposits (FDRs), etc.
Consequently, I vouchsafe that long-term investing in stocks directly or through the route of mutual funds is an intelligent and right wealth creation option and not gambling.
The pleasure of Investing in equity
It could be a pleasure to invest in stocks with coveted patience, keeping cool and in touch with the market with optimism, in a sportsman’s spirit, i.e., enjoy and cherish if you gain, and don’t lose heart if you lose, as a powerful tool of wealth creation. Else hurry or impatience, fear and undue greed may make curry or pain. Therefore, mind your mind for earning pleasure from stocks, with sportsmanship. One could derive pleasure and profit from investing in stocks, at a reasonable price, at every step starting from picking a stock through profit booking. To pick up a promising stock in itself is the first and the most important innovative step. That requires a lot of follow-up, perseverance, and patience. The first source of pleasure after picking up a promising stock is the feeling that you are going to be part of the business of a company, with a minuscule investment. The real pleasure lies in seeing your chosen stock grow, gradually with a steady increase in its value. The real thrill and pleasure come when one is able to sell the stock at the right time at the right value with handsome gain. At the same time, to take it to your strides coolly, even if the value of the stock rises after you had sold it out, and you still get an opportunity to re-enter the stock at a later date and maybe at a much lower price.
I consider investing in equities a thrilling and stimulating activity, akin to the pleasure and pride in nurturing one’s child and seeing him grow bit by bit with time, to a desired and disciplined person, but risky! Sometimes very risky, at the same time! If the decision or actions go wrong, by wrong judgment or misinterpretation. Consequently, the first thumb rule while investing in stocks is to keep cool, have patience with proper feedback and follow up by analytically looking to news, tip, or an expert recommendation!
Tips for happy investing in shares
a). The first step before entering the stock market directly is to start investing in some chosen mutual funds, with a small amount, in consultation with an advisor or a friend, and watch their performance.
b). Start investing in companies in the field in which you have exposure or experience, preferably in your own profession or sphere of activity. Note down 5-6 stocks of your interest and conviction, watch their market trend for a few days, and then invest in 1-2 stocks, to start with.
c). Do not rush to buy a share on news, report, or recommendation by an expert, etc which is sure to give a kick to the stock price. Therefore, it is advisable to wait and watch for some time, for a day or so, to buy, when the price might also cool down, and news, etc. might be verified, in a single day itself. Nevertheless, it might be the right time to buy a share.
d). The best and easy way of investing for a beginner is to invest in Sunrise companies and companies managed by reputed corporates. Say, for instance, groups like Tatas, Reliance (Mukesh Ambani Group), Adani, Mahindra, etc., to name only a few. For a beginner or even otherwise, investment in reputed Navratna Public Sector Undertakings (PSUs), including Banks, may also be preferred, for relatively safe and rewarding investment.
e). Buy or sell in a staggered manner, say in a “systematic investment plan” mode, rather than in a single go.
f). Besides the credentials of the promoters or company, its product portfolio and future scope, futuristic sector, rate of dividend payout, liquidity of the stock in the market etc., are some of the suitable criteria, to pick up stock.
g). No hurry, no haste, but only patience pays. In the words of Charlie Munger, Vice Chairman, Berkshire Hathway, the big money is not in the buying and selling, but in the waiting.
h). As a thumb rule, buy the stock when everybody rushes to sell. The best proof of this dictum is provided by the purchases made during the early 4-5 months of the Covid pandemic period. People who dared to buy stocks during the said period are harvesting handsome gains. I would like to mention Oaktree Capital’s Howard Marks befitting quote in this regard “ The riskiest thing in the world is the belief that there is no risk. By the same token, the safest (and most rewarding) time to buy usually comes when everyone is convinced there is no hope”.
i). Occasional profit booking at considered opportune time and price should be a must. “Indeed, a profit booked is better than profit kept in books. “A rule, which often I follow, is to set an expected price both for purchase and for sale of stock. Quite possibly, the price may increase, after you have sold the stock. Do not worry, and re-enter at an opportune time, if you are convinced of the value of the stock.
j). For whatever reason, we might have bought a stock at a higher price, therefore, appropriate averaging, if convinced of the value of the stock, should prove helpful in rationalising the price of holding.
k). In life, we often say that opportunity knocks at every door only once, but only a few respond to it. In other words, normally we may say, opportunity lost is lost. However, the stock market is unique in the sense that it often offers us recurrent opportunities, maybe after a pause. Thus, wait and watch, to draw decent returns from investment in stocks.
l). Long-term investing say over two years often proves more rewarding.
m). Do not be greedy.
n). Avoid buying shares with borrowed money. Else it may add to risk by adversely affecting returns.
o). To contain undue downward risk, do maintain strict stop loss.
Some thumb rules for happy investing in the stock market:
As per my experience, adopting the following Five “Do Nots” could favourably improve earnings in the stock market:
i). Do not rush to buy a share on a tip or a rumour or news, rather wait, watch and act.
ii). Do not buy in bulk at a time, rather go for staggered buying or selling.
iii). Do not wed a stock, and not be greedy. Rather do go for occasional profit booking, as per your set target.
iv) Do not buy when everybody is buying, rather buy when everybody is selling.
v) Do not buy with borrowed money, that may add to risk.
How many stocks make an ideal portfolio?
In this regard, a frequently asked question is, how many stocks in one’s holding make an ideal portfolio? There cannot be a one-word answer for this, as it may vary from person to person, depending upon one’s management skill, availability of time, and risk-taking capacity. But as a thumb rule, it may be safe to say that a portfolio with about twenty stocks may be easy to handle and manage.
A word of caution
- In stock markets, volatility is a rule, rather than an exception.
- Stocks are never unidirectional in their upward or downward movement, for long.
- Risk is a given feature of the stock market.
- There is no surety or guarantee of returns.