"Rule 1: Never lose your money, Rule 2: Do not forget the rule 1"- Warren Buffet
Have you ever thought how is it possible? You will find there are some common characteristics, a successful investors share with each other. If You are planning to invest in shares definitely you will come with several questions. You might often think, is there any way with guaranteed success in the market? The answer is a big no, but certainly there are some qualities to be a smart investor. Always remember, investment is neither a speculation nor a gambling. Before starting investing, few things you should always keep in your mind. These qualities may prevent you becoming a victim in the market.
- Entry in the market: There is a no perfect time to enter into the market. If You are sitting by the cash in anticipation of perfect time will come then you should know that it will never come. Even you are missing the opportunities. The market always offers to enter, you can start investing any time. Start Investing as early as you can.
- Have An Investment Plan: A smart investors have well-thought out investment plan. You should have goals, set time frame and defined risk appetite to set out the plan that suits your needs. You should decide how much amount you wish to invest, time-frame of your investment and your risk tolerance limit. Smart investors do not need frequent adjustment, and stay with their investment plan.
- No shortcut to growth: Do not jump into the stock market after finding out stories of investors who made huge wealth from it. Do not rush to blindly follow their footsteps. Your journey in the stock market would be different than the others. Past performance does not guarantee it will be the same in the future. Smart investors know this. They understand investment requires long term perspective and hard work to create huge wealth over a period of time. If You are still in a search of a way to get rich quick, you might confuse between investment and gambling. Stock market is not a financial casino. You can make money by hot picks or riding on bubbles, but the more you play with speculative stocks, the more you lose.
- Division of Assets: Division of assets means proportion of your total investible amount to put into each securities. People oftenly purchase equal quantity means they invest different amounts (quantity*market_price) in each stock. Unfortunately, if selection of stocks goes wrong may damage your return in a large extent. Now the question is what have you an option? Yes, You have an option. You should invest equal amounts in each securities to keep risk: reward ratio balanced. Lets understand this with an example, Don’t get confused with its simplicity!
- Situation a) If you have Rs.20000 to invest and wish to buy shares A and share B. Suppose the price of A and B is Rs.12 and Rs.8 per share. If you buy 1000 shares each. In this situation, your investment in Share A is (1000shares*12) Rs. 12000 and in Share B is (1000shares*8) Rs. 8000. Please noted you have invested different amount in each share. Again, suppose the price of the Share A goes down by 50% and price of Share B increased by 50%, then what would be the value of shares.
Share A 12000-(12000*50%) = Rs.6000Share B 8000+ (8000*50%) = Rs.12000Now, your total portfolio value is Rs. 18000 (6000+12000), lost Rs. 2000.
- Situation b) Lets go with the same example, Here the difference is You do not buy an equal quantity rather You invest equal amount i.e., Rs.10000 in each share. In this situation, you will have (Rs. 10000/Rs. 12) 833 Share of A and (Rs. 10000/Rs. 8) 1250 Share of B in your portfolio. Please noted you have invested equal amounts in each share. Again, suppose the price of the Share A goes down by 50% and price of Share B increased by 50%, then what would be the value of shares.
Share A 10000-(10000*50%) = Rs.5000
Share B 10000+ (10000*50%) = Rs.15000
Still your portfolio value is Rs.20000 (no loss). Look at the difference, it's really amazing!
- Invest Consistantly;Be Patient: You must keep your money constantly growing or you can say he/she must keep adding their investment principal regularly. This is a very crucial step. You need to decide which stock you should introduce and which stock you should get rid of it based on your expected risk: reward. You should also keep in mind that good investment takes time to show results. Smart investors understand the ups and downs are normal phenomena in the stock market, that's why they do not disappoint by short term setbacks and they do not expect instant growth as well. In other words, they neither get excited nor get panic by temporary fluctuations. Patience is required.
- Diversified Portfolio: Do not put all your eggs in one basket. Smart investors understand this, and therefore they do not invest all money in one securities or one sector. One negative event can ruin your portfolio. A diversified portfolio is comparatively less risky than holding a single portfolio. Risk can be reduced to simply invest in different stocks. Stop! Don't rush to add to many stocks in your portfolio, it will only increase your stress level. Smart investors know, with the diversity they can only reduce the risk on a certain limit, it cannot eliminate risk component completely. Remember, When entire market is cracking, diversification gets ineffective. In our view, one should have 15 to 20 securities in your portfolio at a time.
- Know Your Risk Tolerance: No pain No gain and High pain High gain! at the time of portfolio structuring, you must know how much pain you are ready to take. It is one of the most important quality of a smart investor. Once they decide their risk apetite by looking at their goal, follow it strictly. If your investment is making loss and still you are thinking the price will come up one day then may be that day come after a long-long time away and you will got stuck with the wrong choice. Smart investors don't do this ever. If their choices goes wrong, they book their losses and move ahead.
- Overdose of Information: As we know 'excess of anything is bad' so, do not stress yourself by lots of information and news. You must be able to know is this seriously going to affect your portfolio performance? If the answer is 'NO' then simply chill and let go! There is no room for hot picks (which is on the top of the speculator's radar) in a successful investor's portfolio. They do not jump in or out of investments with every news floating in the air. Save yourself suffering from 'analysis paralysis'. Overdose of information has been just like over-eating, it's not good for your portfolio and your health as well.
- Sell at Right Time: Sell stocks at the right time is as crucial as buy at right time. Do not fall in love with the rising trend and forget to book your profit. Always remember! Whatever goes up, comes down just like a 'Pendulum'. How do you know the time has come? It's always better to have a stop loss and a target price. It limits your losses, if the decision goes in inverse direction and also prevents you to be a more greedy, if price is rising. There is no right time to exit or book profit, its your target or stop loss which defines the correct time. An exit point of an investor can be an entry point of other investors. So there is no as such defined right time to sell.Simply, stick with your stop loss and target strategy or may change according to the situation to make money out of it. Smart investors do not get emotional to their investment. They understand selling at the right time is a good strategy to maintain a healthy portfolio. They do not hit the sell button due to fear neither hold too long due to greed. You should also keep in mind, selling at the right time does not mean, one should disturb their portfolio daily.
- Evaluation: Periodical review of each share, you have invested in, is very important. Read about the companies and review long term charts gives you an insight about future prospects. Stock Market does not move in a single direction. So, You must revise your portfolio time to time. The low prospective securities with high risk could be replaced with high growth potential with low risk. Successful investors always aware about what's happening in the market and take action whatever needed.
There are several books and articles available to teach you how to become a successful investor, but all in all, your own experience matters. Keep learning and growing. Stop Gambling, Start Investing!
Monday, June 26, 2017
Powered by WHMCompleteSolution