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What's The One Strongest Weapon You Have as an Investor? - Views on News from Equitymaster
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What's The One Strongest Weapon You Have as an Investor?
Sep 12, 2014

I've stayed away from the stock market for the longest time. It's something about the uncertainty of this industry that keeps me away from it. I, like most people, am all for security. I'm about taking calculated risks and doing something that fits into my logical sensibilities, especially where money is concerned.

But that's a theory most of you would rubbish, right? You already know that the above is not true. For seasoned long term investors, investing in the stock market is a calculated risk, a well-researched one, backed by all the intellectual know-how you need. Especially with all the tools courtesy of Equitymaster. Can you really go that wrong?

So why is it then that so many people still stay away from the big bad bourse? Because the stock market is actually about making quick and clever decisions. The true risk-taking in the stock market is in the decision-making itself. And the way to mitigate the risk is probably by inculcating better decision-making practices.

So am I saying I'm not a good decision-maker? No. What I'm saying is, all this while it didn't once occur to me that the same decision-making skills that I use in my daily life can be put to use as an investor as well. Here's what I figured when I applied my own decision-making practices to the workings of the stock market.

  1. Do your own research: No matter how many advisors and services are being offered to you, there is nothing like going through a company's annual reports yourself. And with all of them being available on their company websites nowadays, this is not very difficult. All you need to do is scan the balance sheets, read up a little on the directors and the board and understand what kind of culture the organization has. The way a company presents itself clearly reflects its set of values and tradition. In addition to this gather information from other sources as well. Talk to stock market veterans, attend workshops, monitor the market's movements in that particular trade. This way you can take a more informed and unbiased decision.

  2. Know why you're making the decision: Most of us know we want to make the money, but deciding how much we want and in how much time gives it more specificity. Some have a predetermined plan as to why they want to achieve a target price: It could be to take a holiday, buy a car, pay a home loan, get a daughter married. And these defined needs help them put their purchase and sale into perspective. This approach serves a twofold purpose: It tells you exactly when to exit and also prevents that one big stock market sin - greed. So set a money-making agenda, tick mark the items once achieved and close the deal at the right time.

  3. See both sides of the coin: While buying or selling a stock, gauge the pros and cons of your decision. Is it the right time for you to sell and if so how much, the full lot or some portion of that particular company's stock? How much would you gain or lose either way? How would selling or buying affect the rest of your portfolio? Will you be upsetting the apple cart? Ask a lot of questions, play your own devil's advocate and then come to a conclusion. Remember that either way, the decision should ultimately work in your favour. Like is often said, in stocks the biggest lesson is to make as few losses as possible. Keeping this one principle in mind can save you from making too many mistakes and will increase your net worth exponentially.

  4. Understand your own limits: Most of us know our limits, we know exactly when to stop and when to continue. But somehow we don't pay heed to this inner voice. We believe we can test our luck just a little bit more. The same sin called greed rears its ugly head once again. The best way to get rid of this deadly evil is by being realistic about exactly how much you can lose, if at all. Determine your stop loss and don't waver from it.

    Temptations can be many, daily headlines can be misleading and the chances of success may seem high. But avoid the herd mentality and stick to your path.

  5. Take advice when in doubt: Like most decision-making in other life spheres, this one too happens in collaboration. Consult your financial advisor, your brokerage firm or maybe just sound it off a friend. Very often the best advice is given by the people who you least expect it from. All you need to do is give them complete information and tell them exactly where you're stuck in the decision-making process. Clarity is often realized by sharing your dilemma. But ensure that whoever you consult is someone you trust, and more importantly, someone you trust your money with.

  6. Trust your gut: After all the gathering of information, weighing of pros and cons, consulting and debating, the time has now come to make a decision. On what do you base the decision? Well, in most life situations, most of us follow our gut. It's that inner voice which tells us exactly what to do. Something in us tell us if we should stay put or exit; if we should gain some more or if we've made enough. And this gut instinct is not based on some irrational bout of emotion, it's based on years of cumulative experience exercising our judgment in various life situations. So don't be afraid to exercise it, the best in the market have… yes, even the Oracle of Omaha himself.

    The stock market like us is a work in progress, it corrects, self-corrects, rises and falls, has good days and bad days. But it's a constant companion.

  7. Stand by your decision: This one's the most important - Good, bad or ugly, the decision once made has to be lived with. The gains and losses are both yours alone. And don't feel afraid to live with a bad decision, they happen all the time. Just take the learnings from it and remember to incorporate it in your future decisions. The stock market like us is a work in progress, it corrects, self-corrects, rises and falls, has good days and bad days. But it's a constant companion in our lives, making us richer, smarter, sometimes poorer but more often wealthier, with a whole lot of experience and the promise of more opportunity.
I now feel brave enough to wet my feet a bit and test the waters. I'm going to use these tips to start my very own bull run. Are you?

The Reluctant Investor is taking her first foray into the stock investment arena and wants to take you along for the ride. Read her column to learn what she learns as she explores the exciting world of the stock markets... and write to her with questions and encouragement.

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