5 tenets of investing

Yes, the stock market fall has given many investors sleepless nights over the past few months. But every cloud has its silver lining. Stock valuations have melted to new lows and for those looking to make a start this may be a good time to enter the markets.

Of course, you will get tons of advice from friends who have lost their savings to cousins who have made a quick buck, to uncles who feel they can predict where exactly the Sensex will be, one year down the line.

We wish to join that advisory committee too! But, we come with a difference. While the rest may tell you what you should or should not do based on their personal experience, we just offer five tenets to keep in mind when investing in stocks.

Age vs. Investment style


Stocks don’t lend themselves to a ‘one size fits all’ approach. You are 25, an MBA with a good job in a software company.

Your neighbour is a 55-year-old man, on the verge of retirement. You want equity investments, but have hectic working hours with no time to track the markets. The uncle next door has a lot of time to do what you cannot and buys and sells stocks every day!

Don’t try to emulate him. Your choice of investment may have to be quite different from his. Because you cannot track every market blip, it is best that you leave your stock market investments in professional hands — take the mutual fund route.

You can however, be quite aggressive in your choice of funds. At 55, your neighbour may be very defensive, looking more at protecting his capital and getting a return enough to beat inflation. At 25, you don’t have commitments like a child’s higher education or a daughter’s wedding.

You may be able to hold on longer and take some risk to your portfolio. You can bet on high-growth stocks through mid or small cap funds. Ten years down the line, your risk appetite may change. That is a signal to alter your investment style again!

Long-term vs. Short-term


Imagine the thrill when the stock you just invested in, zooms! What an easy way to make money! Are not good returns over a short period very tempting? Your next move: Identify other stocks that have this potential. From now on, all your energy will be directed towards making that quick buck.

You will find yourself taking tips from every trader, reading every available material on the subject, spending hours studying charts and sighing at every small fall in the indices. Yet, with all the time and energy spent on it, you may end up burning your fingers. Stock market investing, like every other thing in life, requires discipline. First, decide how much percentage of your overall savings you want to invest in stocks. Then, create a portfolio based on your risk appetite. Phase out your investments to reduce risk.

Once you invest your surplus in stocks, make a commitment to stay invested. The market is bound to gyrate and there is no use reacting to its every move.

Fundamentals vs. Momentum


Before you invest in a stock, you must do some groundwork. Research the company. Look at what business it is in, prospects, strengths and weaknesses and how it is placed vis-À-vis peers. Penny stocks may fetch you quick returns in a bull market, but when the going gets nasty, your investments can dwindle to zero just as quickly.

If you bought a stock because you believed in the company’s business, you may have greater confidence that it will rebound, once the markets do. That will also encourage you to stay invested for the long-term.

If you must log on to your trading terminal everyday and are tempted to make a quick buck, set apart a specific sum for a “trading” or “momentum” portfolio. By doing so, you can make sure that you don’t gamble too much of your savings on wild impulses or “tips” from friends, that are bound to sway your day to day stock market decisions.

Big boys vs. You


Don’t buys and sells by the institutional investors move markets? Is it good to mimic the moves of fund managers? Yes, it is, but you can seldom act quickly, to time your entry and exits precisely. Instead, use institutional interest as a filter for your stock choices.

A quick check to see if the stock you bought is also owned by institutions may add to the comfort factor, in owning a stock. Like we said earlier, if you take interest in the company, track developments closely and do your homework, you can also build a creditable portfolio.

Satisfaction vs. Greed


Thousands have lost money in the current meltdown. But there were a few others who saw it coming. We know of a person who had a portfolio worth several lakhs, but gradually reduced his exposures and exited the markets when the Sensex was at 15,000 levels sometime in 2007. His explanation: The market was heating up and he had made enough money.

It is a must that you have a target on the returns that you want to make from stocks each year. Once the stocks or funds reach that particular target, you must have the discipline to book profits. Equally important is the need to curtail losses.

If a 25 per cent erosion in capital is all what you can bear, don’t wait for anyone else to prompt you. You can cut exposures to the investment.