Over the last 10 years, I have been investing in the stock markets. I have been buying on dips in the index with the purchases being based on stock recommendations by experts in news channels and business papers, paid research and sometimes on the “free” tips of the day too, which keep flashing on my screen when I am working on my laptop. A few days back, when I was doing a meticulous evaluation of the stocks in my demat a/c, I discovered that not only were most of my investments languishing at a 50 % – 90 % discount to their acquisition cost, many of them which were repeatedly recommended by market pundits as “multi baggers” and “value stocks” with good long term prospects good trading and used to enjoy good trading volumes had fallen out of favour and were now hardly being traded at all!
And I am not alone. Many people whom I know – the avid stock markets investors are in the same situation. This has happened because during the secular downtrend in the markets, none of us got out of these stocks when they were losing value day on day, since we did not want to “book” a loss. All the sell triggers and stop losses were conveniently ignored, in the hope that the tide would turn soon and we would at least be able to recover the principal .After all, till we actually sell a share at a price less than that at what is was bought, we do not have an actual loss. And a “notional” loss is just notional, right? Then, we end up in a situation like what we are in today.
Wiser from this experience, I have set a few rules for myself, which I feel every stock market investor should follow –
- Take informed investment decisions. Don’t just go by buy recommendations. Do a bit of a research on the company’s fundamentals and finance ratios, ascertain if the share is fairly valued and is worth putting your money into.
- Be disciplined. Set your profit/ loss target. Ensure that you book your profit when your target is reached, even if there are expectations of a further rise in price. On the other hand, limit your losses and exit if the share hits the stop loss.
- Diversify. There are always a few sectors which are favourites at a particular point in time- a few years back it was Information technology, then pharma stocks overtook those and a couple of years back it was the banking sector. Look for good stocks across sectors, don’t restrict your investments to just one or two sectors.
- Invest only what you can spare for a few years without having to withdraw. Equity investments are known to give stable returns only over time.
- Most important – If all this seems tedious and time consuming, yet you want to take exposure to equity, take the mutual fund route. Invest in a mix of large cap, mid cap and small cap funds with a good track record. In this way, you can be a part of all the good companies across different sectors without having to monitor/manage them constantly.