Buying and selling stocks in the share market (share market) is such a simple activity that almost anyone can do it. But it is not everyone’s cup of to turn a profit. Turning a profit requires patience, discipline and research.
Buffett’s two rules of investing are simple to understand at the outset but the profound depth of its meaning is realized after many years of investing and trading. Till you reach that stage, the behaviour of markets would have left you confused about how to avoid losing money. In this article, we break it down for you through 10 golden rules.
Though there is no sure-shot formula to success, these rules will ensure that you have a high probability of booking profits in the long run.
Remember school and college days when you would go for specific tuition classes just because your seniors had recommended it and all your friends were going there. This is a strategy that can backfire big time when it comes to investing in stocks. Do not buy a stock just because a lot of “influencers” are doing so. As Buffett put it: “try to be fearful when others are greedy and greedy only when others are fearful”. Therefore it is important to conduct your own research. Conducting both fundamental and technical analysis along with scuttlebutt are critical before choosing to invest in stocks.
Whether you decide to invest, sell or hold - always make sure that you know why you are taking the decision. Conduct proper research to ensure that your decisions are reasonable. Your investment decisions must be data-driven and not sentiment- or reputation-driven. Ensure that you are able to make a log of all your decisions which can be written down in a diary or saved in an Excel file. Revisiting these notes throughout your investing journey would help you evolve into a better investor.
Remember that you are not investing in a stock, but in the business that stands behind it. When you choose to invest in a company, you must know how they make money, what their strengths are and what are the risks that they face. If you don’t - let go of the opportunity. Buffett had an opportunity to invest in Google before they came out with an IPO , and he let it pass. He had a good reason: he did not understand how the search engine would make money. Did the decision cost him profits he could have made? Yes! But remember that this strategy has also saved him from a far greater loss over the decades. This rule applies to all your investment decisions - for example, if you don’t understand how bitcoins work, stay away from them.
You should have a good idea on what the right valuation and price level for a stock is. But you should never try to time when the market will value it correctly. No one can do that - it is impossible to predict when a shares hit the absolute bottom or top. No one has managed to do this successfully over multiple market cycles.
Once you have developed an investment strategy and identified companies worth investing in, stick to it. Once you have decided on a target price and a stop-loss - stick to it. Once you have decided on how much to invest, and at what pace - follow the plan religiously. When it is your money on the line, the market volatility will set your emotions racing, it will be difficult to stick to your plan in the heat of the moment - but trust the decisions you had made with a calm mind. As the saying goes - get out of the kitchen if you can’t stand the heat.
“If you cannot control your emotions, you cannot control your money.” You would hear the stories of very successful investors, and you will hear of the bear ruining someone else. This will set your heart racing and make you worry about your own investments. When you are watching the share market live (share market live), you will experience a rush. Don’t take any decision when you are emotionally disturbed. Let the emotional turmoil pass and then judge based on data you have.
Among the most important ways of keeping the overall risk under control is diversification. Diversify both in terms of assets and instruments. Remember the adage: don’t put all your eggs in a single basket.
While you can hope for the best, all your decisions have to be based on an objective evaluation of the investment opportunities presented to you. All your plans should be based on realistic expectations of returns, and not the best case scenario
Remember that the markets can be ruthless and take away every paisa you invest in it. So, you should only invest what you can afford to lose. Make sure you have sufficient low-risk investments before taking on anything with considerable risk.
We are living in times where disruptions to financial markets travel across the globe at great speed. Monitor the markets and analyse the impact on your portfolio regularly. What was once considered “safe” may not be safe anymore and you may need to rebalance your portfolio.
Play by these golden rules, and you are sure to beat inflation handsomely. See you at the markets!
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