The Do’s & Don’ts To Become An Informed Investor!

It is said that ‘Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime\’.

We all know, Equities have been the best performing asset class over the past decades. And as we say this, approx. 2.5% of the Indian population invests in them. This dismal number is mainly due to the lack of financial literacy and myths associated with investing in the stock markets.

We often come across some varied ideas that people have on investing in equities. And they range from thoughts of becoming a millionaire in just a few days to knowing for sure that the stock market is a dooms den.

We need to change these mindsets. And that was the prime reason why Research & Ranking was incorporated – to educate and empower investors to make the right investment decisions, and in turn, create wealth.

We wish to ensure that no investor, small or big, man or woman will ever take an uninformed decision with his/her hard-earned money.

Our initiative #YesIAmAnInformed Investor is all about the belief that ‘If you educate an investor, you are helping the entire family to be financially stable by helping them build a legacy’.

This initiative is not to give you the right answers to successfully invest in the stock market. In fact, it will help you to ask yourself the right questions, and needless to say, also deduce the right answers for your portfolio.

Let’s start by talking about the ‘Do’s of investing’ i.e. what you should ideally do to become a successful investor.

Do’s of investing

1. Invest in the right business

It is very important to invest in the right, profitable and novel businesses, with more emphasis on understanding the businesses that you’re entering into. Remember: Investing is not at all thrilling. In fact, more often, being slow, steady and patient helps you win the game.

As Peter Lynch quotes,

“Never invest in an idea you can’t illustrate with a crayon.”

It is crucial to go full-scale on your research, because when you buy businesses with strong inherent fundamentals, you know it will be geared to withstand market volatilities better in the long run and at the same time help you compound returns and grow your wealth.

Let’s understand this better with the help of an example.

Maruti Suzuki, listed in 2003 for a price of Rs. 125, touched a high of Rs. 10,000 in Dec 2017 generating a massive return of 8000%. This happened in spite of the global recession of 2008, and multiple corrections in the last 15 years.

So what makes Maruti Suzuki still an out-performer?

The secret lies in its robust fundamentals such as:

• Market leadership in passenger car segment with more than 50% market share

• Unparalleled product mix, plant capacity, on-ground presence & sales & services network

• Largest network of sales & services network across India

• Change in brand image from entry level car maker to premium car maker

• Strengthening R&D capabilities

• Estimated 20% CAGR growth in profits over next 3 years

• P/E multiple of 21.5x FY20E

Given these strengths, the stock of Maruti Suzuki has further growth potential. That’s why it is very important to invest in the right businesses that can help you multiply wealth over a long run.

Now, the question remains: How can you identify such businesses?

We spot high-quality and sustainable companies available at attractive valuations that enjoys:

• Low debt, capital efficiency & high return on equity

• Healthy balance sheet, revenue growth & consistent cash flows

• Relevant product & competitive moat

• Stringent corporate governance policies & sound risk management process

• Transparent and competent leadership having a vision and plan to achieve it

• Agile and forward-looking to adapt with dynamic industry landscape and innovation

With an impeccable combination of data-driven tools and human intelligence, one can identify the disruptors and agile businesses that can help you create real sustainable wealth for tomorrow.

2. Look at the bigger picture

India is one of the fastest-growing economies in the world and is well-poised and geared-up to become a $5 trillion economy in the next few years.

India is likely to become the world’s third-largest economy by 2030, next only to China and overtaking the US, according to HSBC Holding Plc., with China and the U.S. retaining the top two spots.

Amongst the reasons making this possible, an increased consumer spending is expected to grow from $1.5 trillion to approximately $6 trillion by 2030. With rugged domestic private consumption-led growth and favourable demographic dividend, India economy is galloping its way to become a superpower nation in the right direction. Needless to say, a healthy economy will see a corroborative reflection in the stock markets.

The best example of this would be the global crisis of 2008 that caused investors to sell off their investments in panic and flee the markets like there is no tomorrow. However, investors who saw the bigger picture of India, and remained invested or made additional purchases during this period; made profits on their investments in as less duration as 24 months when the markets recovered.

In 2008, when the markets crashed by 61% post Lehman crisis, they jumped back 104% in just 18 months after that. From a low of 8854.81 on 3rd December 2008, the BSE Sensex touched a high of 18047.86 on 7th April 2010.

This is because stock markets simply follow India’s growth story or data in a long run.

Are you looking at the bigger picture?

Now let’s look at a few cases where investors ignored the bigger picture and got swayed by short-term market volatility, media noise, transient hiccups, etc.

For e.g. During December 2016, many investors believed that the markets shall remain whimsical due to the Demonetization impact. At that time, Sensex was trading between 26,500-26,800 levels. However, to the surprise of these investors, Sensex kept surging and touched 30,000 levels in April 2017.

Having mentioned the allies of an investor, let’s look at the ‘Don’ts’ of investing where we will introduce you the foes of every investor.

Don’ts of investing

It is a strange but harsh fact that when you tell someone not to do something, the chances are quite high that the person will do it first. According to psychology, such behaviour happens because the human brain wants to ensure that we\’re free to do whatever we want to do with our own lives.

The same thing happens in the stock market. We all know trading is similar to gambling, but still many people participate in it for quick gains and lose their hard-earned money in the process. We know penny stocks are dangerous. We know not every news demands a reaction. Still, we commit actions that are detrimental for our portfolio.

So how do you stay disciplined? For this to happen, it is imperative to know the do’s and don’ts of investing. With my experience over various business cycles, observations on successful investor’s habits and interactions with the top-notch analysts, I have only 3 don’ts for you to invest successfully.

1. Stay away from trading if you are not a skilled trader who understands all the technicalities of the markets

It is said that 90% of small investors lose money in stock markets. We are very sure that this 90% are not investors but rather traders who fail to understand how the market works.

When somebody is selling at a loss, remember somebody else is making profits.

So it is quite obvious that the money lost by 90% of people are earned by other 7-10%. There are various reasons why intraday traders lose money such as failure to understand market and business cycles, trading without a stop loss, investing based on tips, etc. But most importantly, they fail to understand that equities are the riskiest asset class if you’re investing for a short-term. In short-term, stock prices are determined by the sentiments, which are difficult to predict. Hence, one needs to conduct rigorous fundamental analysis to create wealth in a long run.

Big names are no guarantee for big returns. That’s what happened to investors who blindly invested in shares of Reliance Power on the basis of herd mentality, without checking the fundamentals of the company. Reliance Power had almost no assets and cash flow. It was riding only on the brand name and also the euphoria around India\’s stock markets.

To summarize: Don’t just go by the herd mentality or free reports, conduct research while you invest. It is important to know what you own and why you own it. Only invest in businesses that you understand and believe in with full conviction.

2. Stay away from taking leveraged positions

Leverage is the ability to trade a large position with only a small amount of trading capital. We agree it can be very tempting to buy more stocks than your trading capital in hope of higher gains. But beware it is a vicious trap as it can also lead to big losses. While trading with borrowed money, you can’t afford to lose and hence you may panic easily on the slightest correction. Also because of higher exposure, the losses will also be proportionately higher. Hence, we never advise investing through leveraged capital.

Let’s understand this with the help of the below example:

Ravi has a fund of Rs. 50,000 in his trading account. Using leverage of 10 times limit given by his stockbroker, he buys 5,000 quantity of a stock trading at Rs. 100. Now if the price goes up by Rs. 10, he will make a profit of Rs. 50,000 (5000 qty x Rs.10) but if the price goes down by Rs.10 he will lose his entire capital i.e. Rs. 50,000 (5000 qty x Rs.10).

3. Stay away from the continuous news flow

We often come across people who invest primarily on the basis of news flow. They are constantly hooked to business news channels in hope of finding some breaking news that can give them an information edge over others.

Investing based on the news can be detrimental for your wealth. Experiments by psychologists have revealed that paying close attention to financial news can lead investors to trade too much and to earn lower returns than those who stay away from the news.

So if you are investing for the long term, you should largely ignore the daily news and only pay heed to the relevant information.

We’re sure you must have read about the massive financial crisis faced by Jet Airways over the last few months. As a result, its stock price has fallen to 52-week lows. Then came the news on business channels that the TATA’s were planning to buy a huge stake in Jet Airways. As a result of this news, the stock jumped by 24.52% bringing along a new wave of investors who bought its stock in anticipation of a further rise.

However the deal never materialized and the stock fell by a huge margin, making losses for the investors who invested in the stock on the basis of the news.

If you want to be a better investor, you can safely stay away from these ‘Don’ts’. With this series, we really hope you are all set to make an informed decision and empower even others not with the next stock idea, but with the methodology to find the next stock idea.

Read more:  How Long-term investing helps create life-changing wealth – TOI.