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Discipline - The order of the day - Views on News from Equitymaster
 
 
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  • Dec 3, 2003

    Discipline - The order of the day

    From the lows of 2,904 seen by the BSE-Sensex on April 28, 2003, the index hit a 52-week high of 5,205 yesterday (December 2, 2003). That is an incredible gain of 79% in mere 7 months for the benchmark index! Now, here we are not going to predict what the index will do next or where is it headed. In fact, in this article, we have tried to list down a few points to be remembered by every investor, especially retail, while investing in the stock market - whether bull or bear. Further, we must point out that this is not an exhaustive article and there may be a lot more things that must be kept in mind to be a winner in any stock market over the medium-long term.

    Some of the key points are:

    • Avoid tips / rumours: During any bull run, this is the first thing that gets activated in a rising market. Since, unfortunately, everything and anything goes up in a bull run, markets are always abound with 'tips' and 'rumours'. Some people even claim the news to be directly from the horse's mouth, which is more false than true. Retail investors need to exercise strict caution here and avoid such calls.

    • Avoid illiquid stocks: A direct repercussion of the point above is that investors tend to invest in stocks, which are rather illiquid. This is because the so-called 'tips' generally surround the illiquid stocks. As is noticed during bull runs, that stocks, which probably have never traded for years together, suddenly see a spurt in volumes. And it is not difficult to guess which investor class props up the volumes in these stocks considering that fund houses and foreign money do not have such stocks in their investment radar. And it must be noted that the volumes in these stocks dry up even faster than they have gone up.

    • Mid-cap stocks are not bad: Investing in mid-cap stocks is not a sin if the stock is backed by a fundamental story. However, investing in mid-cap stocks with a view that they are the ones likely to yield extra-ordinary returns is a wrong strategy. Agreed that most of these stocks will unfortunately trade and 'may' even provide some eye-popping returns, but we must point out that when such stocks go back into reverse gear, it will be too late for the investor invested in such stocks. He would then not only burn his fingers but also his hands.

    • Avoid herd mentality: Do not buy a stock just because the whole market is talking about it. Generally when the markets start talking about a stock, they would already have had a handsome run on the bourses. It is precisely when the stock has given huge returns within the shortest time span possible that the stock will come into the limelight. And God forbid, it is quite likely that after you have bought the stock, the only direction it heads to is down.

    • Avoid greed: This is one of the most investment 'practices' one should abide by strictly. Keep strict targets for yourself and do not hesitate to square off positions when the price target is achieved. Beyond the justified (target) price of the stock, it is just expectations and market momentum that takes over the stock. Similarly, to look at the other side of this, do not get emotionally attached to a stock. If the fundamental of the stock has changed due to any unforeseen and unpredictable development, get rid of the stock. There is no dearth of opportunities in the stock market.

    • 'Patience' is the keyword: We are a firm believer of investing for the long-term. Infact, the possibility of you making money is much higher in the long-term vis-a-vis the short-term. It is important to note here that over the long-term, equities have outperformed all other asset investment classes.

    • Do not borrow and invest: Borrowing and investing in the stock markets is not a good strategy to follow. In this case, your stock market earnings will be first used at servicing the debt taken and after that the left over will be your profits. In fact, it is quite possible, in order to increase the returns, since a major chunk goes towards interest payments, the investor might be forced to take higher risk (for higher returns), which could be well over the investors risk appetite.

    • Expert advice - a better option: The help of an expert is always advisable, irrespective of the phase in which the markets are. Since it is not everybody's cup of tea to analyse financial reports/statements, it is best advised to seek professional help in matters of investing. Not only do the experts have a skill to detect fundamental stories, they are also in a better position to read the fine print in financial reports/statements. However, it must be noted that experts are NOT impeccable and uncertainties are beyond anybody's control

    • Valuations are important: Whether expert advice taken or no, whether investing in a bull market or bear and whether investing in penny stocks or stocks with huge market capitalisation, valuations are the most important thing that any investor, big or small, needs to consider while investing in a stock. However, it must be noted that while it is not necessary that a low valued stock is an attractive buy, it should also be noted that it is not necessary that a stock with rich valuations is a bad investment pick.

    • Diversify: It is always advisable to diversify your portfolio not just amongst stocks of a particular sector but also amongst various sectors. Diversification plays a risk mitigation role in one's portfolio. However, at the same time, diversification does not mean that you own beyond your capacity to keep a track of the same.

    • Ability to take risk: Last but not the least, assess your risk profile. Invest in stocks, which suit your risk profile. Risk profile depends on various factors including the age of the investor, his dependants, his financial needs in the near-medium term, etc.

    We must again reiterate the fact here that the above is not an exhaustive list of things of 'to do/not to do things' while investing in stock markets and neither are they a foolproof method of guaranteed returns. However, they will go a long way in mitigating the risk factors considerably. All the above factors (and we are sure there will be many more) are a part and parcel of one big important factor i.e. DISCIPLINE, which holds the ultimate key to success in investing. After all, you don't want to get caught on the wrong foot do you?

     

     

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