- Rule 1: Run a marathon not a sprint
- Rule 2: Emotions are not bae
- Rule 3: Know Your Investment (KYI)
- Rule 4: Quality over quantity
- Rule 5: Stay away from the herd
- Rule 6: Diversification is your friend
- Rule 7: Discipline
Rule 1: Run a marathon not a sprint
When it comes to stock markets, you need to have a long-term orientation. If you are looking to earn just a quick buck (and are not a professional investor) or have a myopic approach to the stock market, you will not be able to realize the optimal potential of the investment. The aspiration to become an instant millionaire is the root cause of most debacles in the stock market. Stocks are not lottery tickets!
But then what happens in the long run? The answer is compounding. The power of “compounding” is immense. (Remember your mathematics teacher telling you how compound interest is more than simple interest?) When you hold on to your investment, then you earn interest not only on the principal contribution but also the interest earned thereon. Hence, it is like you can have your cake and eat it too!
The longer you remain invested, higher is the potential impact of the compound performance. As the business tycoon Warren Buffett put it, “Stock markets are a device to transfer wealth from the impatient to the patient”. So, be patient.
Rule 2: Emotions are not bae
Remember Rajesh Khanna saying, “Pushpa I hate tears”. Stock markets feel the same for emotional investing. Emotions cloud your judgement and often lead to wrong decisions. Whether it is the greed of wanting more (in a bull market) or fear of losing out (during bearish phase), if your decisions are not backed by solid judgement and in-depth research, you are likely to burn your fingers badly. There have been umpteen cases where investors have gone into a panic mode due to a slump in the market and sold off their investment at rock-bottom valuations. Always remember that markets are cyclical in nature. Even the worst of days are followed by sunshine. So do not take any decisions guided by emotions.
Rule 3: Know Your Investment (KYI)
Every fund house needs to mandatorily complete KYC (Know Your Customer) of the investor before bringing them on board. Did you know that it makes sense vice versa as well? Before investing in any stock, you should have detailed information about the company, its USP, competitors, market share or industry positioning, growth plans, management, etc. As they say, you do not invest in a stock, you invest in the business.
Rule 4: Quality over quantity
Stock selection plays a crucial role in determining your investment’s earning potential. Remember that form is temporary but class is permanent. Invest in stocks which are backed by fundamentally strong businesses, led by capable resources and with robust practices. Just because a stock is available at a cheap price does not make it a good investment. You need to understand the reason for the valuation of the company and then decide accordingly. It is not a bad idea to be a bargain hunter, but you need to see the value. Value investing (propagated by Warren Buffett) looks for undervalued stocks which are inherently strong and have a higher intrinsic value. It is always better to put your hard-earned money in a good stock which is reasonably priced rather than invest in a reasonable stock available at a good price.
Rule 5: Stay away from the herd
Stock market investments should not be as fashion trends. You should not put your hard-earned money in a stock just because your friend, relative or colleague is doing so. Following the herd will backfire strongly in the long term. You should stick with your overall investment plan. Do not give in to the temptation of investing in the “popular” stocks if they do not align with your financial goals, risk appetite or investment horizon.
Read a complete guide to financial planning.
Rule 6: Diversification is your friend
A wise person once said, “if you invest and do not diversify, you are literally throwing out your money”. When you venture into stock market investing, the risk is inevitable. However, there are ways and means to manage or distribute the same. Diversify your portfolio across multiple asset categories (equity, debt, etc.), instruments, market capitalization (large-cap, mid-cap and small-cap), sectors or even geographies to minimize the risk and maximize the returns. Different asset classes respond differently to market fluctuations and phases and hence under-performance of one can be compensated by others’ good returns.
The only caveat is beware of over-diversification. Too many stocks in your portfolio can become an unnecessary management burden and bring down your earnings rather than protecting them.
Rule 7: Discipline
Discipline may be rarely enjoyable but is almost always profitable. You might be tempted to “time” your investment decisions to get the best side of the market or skip some of your periodic contributions. But resist those thoughts. Timing your investments is a utopian concept which does not work out in reality. All it does it justify your need for procrastination and reduce your earning potential. If you are banking on catching the highs and lows, you are in for a rude surprise. The mantra for success is to adopt a disciplined and systematic approach to investment. Keep calm (or patience) and the rewards will roll in the long run. Slow and steady definitely wins the race when it comes to stock market investing.
In stock markets, there will be ups and there will be downs. But if your investments follow these simple yet effective ground rules, you will be able to cross even the most tumultuous times and accomplish your financial goals.
Want to learn more on how to invest in the stock market and earn money, Download a FREE guide on how to invest on stock market.