Investing directly in equity markets, also known as direct equity investing, takes quite a bit of time and energy, not to mention loads of research and patience. Yet it's hard to sit still when the market is sliding. You can't help but think: "Shouldn't I be doing something?" Successful equity investing is about embracing certain resilient rules or principles, the golden rules of investing, if you may. Every investor is different, but here are a few steps that everyone should consider.
This is the most basic prerequisite for investing in equities. You must have a good understanding of the product / service offered by the company - where the product finds usage, the manufacturing process, the value-add, input costs. If you find the product / service too complex or too good to be true, it’s better to give it a miss even if it appears exciting. If you feel remorse later, remember Warren Buffet who refused to buy technology stocks in the dot com boom in 1999 and lost on some gains initially only to find redemption in the crash that followed.
If you are going to need your money in a hurry (within 3-5 years), equity markets may not be the right place for you. While you are investing for the long-term, you instinctively adopt certain traits like giving the daily noise a miss and looking at companies with a more serious, long-term perspective. You automatically align your point of view with the company’s point of view. So if the company has set up a plant and expect returns to start reflecting in the stock price three years later, that’s also how long you will wait for the stock price to start moving up.
Investing is a painstaking activity about identifying the right companies. It involves understanding the business of the company and the opportunities and threats it’s likely to witness over time. This analysis does not get simpler because your friend or colleague bought a specific company or because a company is in the benchmark index or because it was recently in the news. In other words, there is no short cut to study and analysis. You just cannot expect to identify a good company through the choice of your friends or the benchmark index. To quote Sir John Templeton - If you want to have a better performance than the crowd, you must do things differently from the crowd.
A lot of individuals are flustered with market volatility. Their response to market irrationality is with some irrationality of their own – so they end up selling in panic or avoid markets altogether for a while. You may rue this response in future.
When stockmarkets are in panic mode, that’s the time you must add to your portfolio. Disclaimer – Be prepared to suffer additional short-term pain, but do not wince, instead increase your positions so long as you have conviction.
To re-quote Sir John Templeton - Invest at the point of maximum pessimism.
Successful equity investing is about following certain golden rules like:
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