Stock Market Basics of Investment Philosophy – For Beginners

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All investors need a plan you stick with, through thick and thin, no matter what the market does.

It is a common sight of small investors, who are new to the stock market, trying their so-called luck, squandering money, getting dejected and forever staying out of the market. For those who are interested in the stock market, but have not been able to make their way through it due to inexperience or misinformation, have listed a few key aspects on the stock market, based on my personal experiences.

Basics – Stock market is a replica of life. If you treat it nicely, it will treat you back nicely. If you play around with it, it will royally mess around with you. The stock market is not a place for a quick buck, for gambling or for over-night success. It is a place to create wealth for yourself over a long period of time. You do not need earth shattering talent or knowledge to make reasonable returns in the stock market. Your investing principles and discipline are more important than the knowledge of the individual stocks, financials, trends, technical charts etc. Get into the stock market only if you are ready to stay for long term, ready to take risks and treat losses in your stride.

Average – Believe in averages and celebrate the exceptions. Believe in the bell curve. 80% of humanity is average. All of us are average outside our own fields. The stock market is no exception. In general, the stock market will give you a decent return over and above the bank fixed deposit rate of returns. Miracles do not happen every time. As a part time investor, you shall never be able to catch the market when the prices are low and sell the stocks when the prices are high. Exceptional returns do occur in the stock market for a beginner or an amateur, but it is rare, occasional and largely due to lucky stock picks. So, always expect average returns on your investments with a few exceptions which could be complete loss or very high returns. When your expectations are average, you will handle the surprises better.

Long term – This is the single biggest factor to create wealth in the stock market. As they say – No investor has ever lost money in the stock market, only the traders lose. The stock market is not a 100-meter dash (leave that to Usain Bolt). It is a marathon. You need to hold the stocks and run for a long time to create real wealth. The principle should be to buy it, demat it and forget it. Sleep over your stocks. Fluctuations in stock price on a daily, weekly and monthly basis mean nothing as many a times prices are fluctuating for no apparent reason (when the reasons for fluctuation are not known either the crude oil price or North Korea is blamed for it!). The other long-term principle to be strictly followed is to never pull out your portfolio in panic due to a sudden crash in the stock market. The stock market always has the power to rebound over short-term crisis, unless a big asteroid is heading towards the earth. Go long for longer bank balance.

Cycles – Cycle of time is real. Day and night repeat. Seasons repeat. The universe may be repeating itself in an infinite loop. Stock markets also go through repeated cycles of ups and downs. Bull market and bear market keep pushing and pulling the prices up and down. No trend is permanent. Impulsive reactions to the prices without considering the cycle of the stock market can damage your portfolio forever. Do not react along with the stock market when the stock market reacts to economic downturn news or some other random news. If you stay long enough in the stock market as an observer without getting involved, all cycles and trends will even out to hand you over an average return.

Risk – Risk is inherent and integral to the stock market. There are no risk-free stocks. Profits are not guaranteed but loss are guaranteed. Everything in the market comes with varying degree of risk and you cannot escape the risk. You can only minimize the risk. To reduce the risk, invest money in small chunks spread over different time period so that you get a better average price. To further reduce risk, stay with blue-chip companies and companies that make up the index (Sensex, nifty etc.) as these would be tried and tested companies. Alternatively, you can also start with investment only in mutual funds (which are handled by professionals in the field) and gradually progress into stocks. Risk is good as it builds your acumen in investing.

Stock picking – The art of stock picking has not been mastered by anyone. Even the best experts can go wrong. To know what stocks to pick, you should first know what stocks not to pick. Do not pick stocks based on friendly tips, neighbour tips, colleague tips, life time free analysis providing company tips, SMS tips, tips on the discussion forum of websites or tips from your dreams. While some tips may randomly work, most casual tips do not work. Stay within the boundaries of industries that you understand and develop a basic knowledge about the following – Cash flow of the company, Earning per share (EPS) ratio, Price to earning ratio (PE Ratio) and the Industry PE ratio. There are tens of other parameters, ratios and technical charts that can be and are analyzed, but for every stock you buy, the above parameters should give you enough information on whether the stock price is worth it and its future. Once you pick the stock applying the above criteria, Murphy’s law will operate and your stock will start going down while all other stocks will go up. Ignore the temporary movement.

Exit – The time of exit from a stock is the most difficult thing to figure out. Here, human greed takes over. Even if the stock has given you a much higher return than expected, the mind keeps saying that the stock with double and triple and not allow you to sell it. Make that hard call. Let go of the greed and exit at a tidy return before it is too late. Else, if you want to become another Warren Buffet, the ultimate stock holder, hold your stock for another 30 years (with no guarantee of course!).

Winning in the stock market takes time, patience, a bit of analytical work and discipline. Through initial trial and error and failures the learning will come thick and fast to give you adequate knowledge to manage the markets.

Happy investing and stay long in the market!