Want to invest in the stock market? Here are some important tips that can enable you higher returns whilst preserving your capital.
Investing in the equity markets has traditionally, at least for the layman, been the quintessential way to earn an extra buck. This more often than not has led them to burn their hands in the process.
Hence, it’s of utmost importance that people curious and serious about equity investing do it with a very systematic and careful approach.
Here, I lie down some of the most important tips that can enable higher returns whilst preserving capital.
1. Don’t run after tips
Almost 9 out of 10 people I’ve met have gotten into the markets because of a tip they’d received from a “well-wisher” or an insider! Logically speaking, why an “insider” would disclose the know-how of a listed business out in the open when even our local samosa vendor wouldn’t like to disclose his recipe. Running after tips without doing your own research can prove fatal for your trading account. Instead one should conduct thorough research about the company before investing their hard-earned money into it.
2. Fundamental analysis
Speaking of research, not everyone in this world has the temperament and mentality of conducting thorough technical analysis and investing on the basis of that, but, we all can read right. The greatest investors on the face of this earth have all been bona fide fundamental investors. From Warren Buffett to Charlie Munger, all have built cornucopian amounts of wealth by simply thoroughly understanding and researching about all aspects of the businesses they’ve invested in.
Irrespective of the quantum of the corpus, as an investor, it’s always better to invest in a systematic manner than to go all in. To this, the aforementioned event is what you call a Black Swan event, a rare occurrence that happens once in a lifetime, and waiting for that to reoccur is simply stupidity! Instead, we should plan our portfolio in a way that even in the aforementioned rare occurrence, we should be well placed to take advantage by increasing the amount invested in that particular month or year.
3. Diversification is good, not over-diversification
While having all your money invested in 1 stock or sector may be too big a risk to take, diversifying between the companies you invest in is prudent and bodes well for the longer term. However, over-diversifying, i.e. investing smaller amounts in anything and everything you see, can be detrimental to the long-term growth of your portfolio. This is why it’s better to invest respectable amounts in a smaller number of companies rather than smaller amounts in a large number of companies. Doing the latter would inevitably nullify the gains you make from one stock with the losses you make in others.
4. Always know how much you can afford to lose
I cannot stress this enough. A layman investor before entering a stock would know when to get out of it, for eg at a profit of 20-30% but wouldn’t know when to get out if it takes a downturn. Instead he’d rather invest more in it with the hope that it’ll take a UTurn. This is the most common and the most dangerous mistake to make.
If we just flip this scenario and the person investing knows beforehand how much he can afford to lose before making an investment, he would have more opportunities to invest, reflect and improve. And not having a max cap of getting out when in profit, would enable him to enjoy truly multi bagger gains and compound his portfolio multifold.
