I often meet people who are just starting out as stock market investors but have no idea where to begin.
Then there are others who have been investors for some time, but are still clueless about taking their next, and the next step.
If this is the case with you as well, here are 6 simple things that you must keep in mind as you enter the stock market.
These are in fact the 6 lessons that I have learnt the hard way over the years. But you must not go through the same cycle, and these lessons will help you be safe, and emerge successful, in your investment journey.
Let’s start right here.
1. Don’t believe that the market is logical
The stock market is primarily moved by perception and emotion far more than reality or logic.
So invest in what you see, not what you think you should or want to see.
2. Don’t try to beat the market
One big truth about investing is that ‘beating the market’ is not a sensible, proper goal.
The only goals of investing you must have are:
- To keep money (capital protection), and
- To make money (capital appreciation).
‘Beating the market’ is just a whim. The reality is that your core goal must not be to beat the market, but to meet your financial goals with comfort.
To achieve that, whether you earn same as the market (Sensex), or 1-2% here or there as compared to Sensex’s returns, makes no sense.
Trying to beat the market is like climbing onto a treadmill that never stops. It eventually exhausts you, and you come flying off it.
3. Turn off the noise
It is my strong belief that information overload and noise acts as a big hindrance to most investors in achieving their full potential. So the first first step is to stop watching all business TV.
In addition, to perform better this year, you must stop wasting time on seeking out advice and opinions that only serve the interests of the advisors.
Instead, learn the simple rules of investing yourself, do some hard work in analyzing companies, have patience, and you’ll do much better than most of the advisors out there.
4. Understand ‘yourself’
Not everyone can be a long-term investor because it requires discipline and patience that not many people have. So, figure out how much time you can devote, what skills you already have, and formulate an investment strategy that works best for you.
There’s no point in copying others, for you are unique, and so must be your investment style.
5. Accept you will make many mistakes
One of the most important traits of successful investors is that they recognize the frequency with which they can get ‘clean bowled’ – and thus they have a plan in place to deal with such situations.
This is the first lesson most new investors fail to digest, and thus neglect.
I have been a stock market analyst and an investor for the past nine years. And, to say the least, I have been rather frequently – and on occasion, quite spectacularly – wrong. But that is something I always expect to be.
No one really knows what is going to happen in the future. This is especially true when it comes to the stock market. So why pretend otherwise?
When you expect to be wrong, it makes it that much easier to both plan ahead and manage risk.
6. Never move out of your circle of competence
“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over,” said the master investor Warren Buffett.
Buffett follows the concept of ‘circle of competence’ while searching for businesses he would like to invest in. In simple terms, your circle of competence with respect to investing defines your understanding about certain businesses.
The businesses that you understand fall within the circle, and the ones you don’t understand fall outside it. Also, you don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.
As Buffett says, “The size of that circle is not very important; knowing its boundaries, however, is vital.”
So look for simple businesses that you can understand (the 1-foot bars) instead of worrying about how you can understand a complex business (7-foot bar), when the people running the show themselves don’t understand it!
Well written Vishal,
Its not always true that the business we understand will make money for us.
To quote one example-I am from Hyderabad, Deccan Chronicle is the News paper which we all used to read in our school, hostel, college libraries. It’s the newspaper which i get at my home everyday and if someone happens to look for DC after 10AM, he hardly gets it.
Simple business which i understand, 90% of the people and places i know gets and reads DC.
But, this is the only stock which is showing around 35% loss in my portfolio…LOL.
Just interested to know the list of a few stocks, which satisfy your investiment objectives; namely Capital protection (i.e. no downward movement of stock price at all) and Capital appreciation (i.e. it has only upward movement). Is it possible in real life situation?
Nice article Vishal, gives a perspective to novice investors. Turn off the noise and Patience would be the two most important things an investor needs to focus on, ofcourse after selecting a value stock.
@RichFellow I think you have misinterpreted the term “understanding the business”. If you try to re-understand (if that’s the right word) the same DC business using Vishal’s StockTalk method, you will understand better. It could also be possible that you actually understood the business and bought over intrinsic value.
Few points to add.
1. Know your risk taking capability and your asset allocation ratio. Dont fix your asset allocation ratio based on market condtion (Bulls or Bears).
2. Know your investment goals, target and time frame to achieve that. Driving without knowing the destination is meaningless.
3. Know your investment vehicle to acheive item.2 above.
4. Direct Stock Investing is not the only way to achieve your goals. There are many other investment vehicle available like MF, FD, PPF, Gold etc.
5. Do understand how much risk and return is there in each of those investment vehicle, before you choose to invest in them.
Stock Market Investment Software says
Great information, also.. Although it is more important to invest in a highly profitable business than a business that has superior management, you
should watch out for snakes. Even businesses that are extremely profitable at the moment
can be bad investments if extremely bad management is
in control. If you discover a business with management practices that make you leery,
then stay away.