Investing is not a science; it is an art form. It is a continuous process where investors are constantly learning, and there is always room for improvement. We receive a tonne of investment advice, but unfortunately, it’s both good and bad. And while you can’t always differentiate between the two, there are some steps, more like thumb rules, you can follow to better your investment decision making.
1 . I will always keep a buffer when buying stocks.
A great way to minimize your losses is to buy fundamentally good stocks at a discount. The logic behind this is simple. This discount creates a buffer, a margin of safety. So on the off chance, things don't work out as you had thought, your loss is minimum. But this strategy takes time to play out, much like any good investment idea which needs time to realize its full potential. And for which the next step is equally important.
2 . I will practice patience at all times.
Jim Rogers once said in an interview: ‘’I’ve always been accurate but early. If I’m convinced something is going to happen or if I should make an investment, I have learned that I should wait for a while, because maybe it is too early. And it usually is too early.’’ Need I say more?
This is just one of the top investors in the world. Most of them swear by the fact that investing requires patience.
It is perhaps one of the most common traits successful investors share. When you think about this, it makes perfect sense. A good investment idea will be available at a discount if you (and a few others) are the only ones to have identified its potential. Because if others also understand it, they will rush to buy it, increasing its price in the process.
Look at what Mr Jhujhunwala did with Titan Company. He bought a tonne of shares in 2003 @Rs.3 and held onto it (current value: Rs.1,067) and waited patiently. And today, this one investment, held on for more than 15 years, has earned him more than Rs.2,000 crore, a true testament of how time and patience can help you multiply your wealth.
Now, I am not condoning you buy and hold shares for 20 years. All I am saying is that a good investment strategy takes time to play out. So, focus on a fundamentally strong company with great potential at a good value and wait.
3 . I will cut through the noise, focus on my research and stick to my plan
As difficult as it might sound, you must cut through the noise around you. The noise that I am referring to is all the short-term predictions and market movements news anchors and analysts often indulge in. It is all the poorly researched stock-tips and the unsolicited advice you get.
As an investor, your job is to do your independent research and stick to it, paying little heed to what others around you say. If you are constantly listening to the noise around you, you are bound to get distracted and sway away from your goals.
So, avoid anyone with a short-term view of the markets. Listen to experts who have built their wealth investing over the long-term. Spend your time reading annual reports and financial books instead of browsing through news channels.
4 . I will up my savings game.
People often tend to put off investing, thinking they aren't saving or earning enough. They forget how investing even small sums of money regularly can amount to a lot over time with the power of compounding.
So start saving and investing early in life. Develop a budget and stick to it. Identify the difference between your needs and wants. It will help you avoid unnecessary expenses and boost your savings. Another great way to increase your savings is by spending “what is left after saving” rather than saving ''what is left after spending”.
5 . I will not be Greedy or Fearful.
Extensive research tells us that emotions and investments don't go well together. If you panic (fear) and sell every time the markets fall, chances are you will never create wealth over the long term. Similarly, when the markets rise, and you invest, you won't always profit (greed). So the key is to keep all emotions at bay.
Furthermore, ignore any get-rich-quick schemes and stock tips, as successful investing needs time for the power of compounding to work its magic. And even if you tend to panic, remind yourself of the story of cycles in the stock market because a bull market always follows a bear market, which will be followed by another bull market.
Just believe in your research and keep a firm check on your investments. But you can only achieve this by fighting any emotions that get in the way of your long-term planning.
I will only bet selectively.
''To me, it’s obvious that the winner has to bet selectively” – Charlie Munger.
The key to succeeding at investing is to discover a hidden gem and bet on it, aggressively. If you build a large portfolio of 50-70 stocks, chances are your returns will be marginalised. And even though it will help limit your losses, it will also cap your profits.
You only need a few great stocks in your lifetime. As just a few good outperformers can create all the wealth you will ever need.
Imagine having a stock portfolio of 10 stocks. Now, there is a good chance that all might perform well. But not all can be multi-baggers.
''All you need for a lifetime of successful investing is a few big winners. In this business, if you're good, you're right six times out of ten. You are never going to be right nine times out of ten.’’ - Peter Lynch. The stocks markets are not pure science. Or even like a game of chess, where the superior position wins. So, build a relatively small and concentrated portfolio of 10-12 stocks. Even if 6 out of 12 perform well, you should be glad.