Ten Commandments of Successful Equity Investing

By Jiten Parmar via Another Forum

Ten Commandments of Successful Equity Investing :


1. Discipline : The first thing an investor must learn while investing in the markets is discipline. The investor needs to be disciplined as to when to buy the stock and when to sell. If there is euphoria all around and tips are flying around, investor needs to be disciplined enough to not invest at this time. That is generally the best time to book profits in existing portfolio. At the same time, if investor finds market very undervalued, but there is pessimism all over, he needs to go ahead and buy. These may turn out to be his best buys. Investor needs to be greedy when everyone is fearful and fearful when
everyone is greedy. Do not go with the HERD MENTALITY. Exercise CAUTION during euphoric periods. The best mantra for making money in the stock market is “BUY when CHEAP and SELL when EXPENSIVE”.

2. LEARN before you EARN : One of the most important thing an investor needs to do is READ, READ, and READ. Before you invest your hard- earned money, read everything about the stock. Learn to read quarterly results, annual reports, read about peer companies, read about that particular industry in general. Make sure that the stock being bought is undervalued or reasonably valued. Do not chase a stock on the way up.

3. Conviction : If you have purchased a stock after thorough study, have conviction in the stock. Keep buying the stock at every fall and average your stock. When tide turns, this can give you super profits. Conviction in the stock is important.

4. Everything has a Price : Every stock has a right price. Many investors typically make the mistake of holding onto a stock for decades. But if you do make a close analysis you will generally find that the stocks had done very well when the companies were mid-caps and were growing at breathtaking speed. After becoming large-caps growth slows and there will be periods of massive overvaluation. These are the times when investor needs to book profits and rotate to less expensive stocks or wait for reasonable valuations to re-enter the stock. There are a number of stocks which have done anything for the investor’s portfolio for almost a decade.

5. Portfolio Allocation : Everyone should do a portfolio allocation according to their risk appetite/age and other factors. What is typically observed is that there will be periods when portfolio weightage completely changes without investor actively changing anything. If stock market is in an extremely bullish phase than equity pie becomes large. One should bring it back to its original allocation. That would mean booking profits when valuations are very high. Conversely, in a bearish phase the equity pie shrinks and investor needs to shift from debt to bring his equity pie to the
original one. This would mean buying into equity at very low valuations. This approach really works and one needs to be disciplined in following this.

6. Diversify : Do not put all you eggs in one basket. Diversify your portfolio over different stocks/industries. Ideally no stock in your portfolio should be more than 10-15% of your holdings.

7. Give Equity Some Time : Do not invest in the stock market with a short-term perspective. Invest only surplus funds, which you will not need for a long time. Often investors are forced to sell their stocks when it is the worst time to sell, because they are leveraged. Give your stocks time. Markets will have swings and can stay bearish for long periods of time and do not accord stocks the valuations they deserve. If you have conviction, these are great times to buy.
Typically, I ask people to invest with a 5-year+ horizon. This does not mean that you will be stuck with the stocks for 5 years. If during this period, stock runs ahead of fundamentals, book profits.

8. SIP : SIPping is the best way to invest in stocks. As is the nature of the markets, it gives corrections and many opportunities to buy stocks at lower prices then your previous purchases. If there is no drastic change in the prospects of the industry and the stock, have the conviction to add more quantity. SIPping brings down your average price and can help in giving stupendous returns.

9. Continuous Monitoring : Continuously monitor the health of the stock and the industry it operates in. Monitor quarterly results, announcements, etc. If something fundamentally changes with the stock or the industry take a fresh call.

10. Reward Winners : Do not try to offset your losses in losers with punishing your winners. Typically investors hold onto duds in hope of getting their price and sell their winners. This should be avoided. Don’t be afraid to admit mistake on the losers.