A must read if you have lost more and gained less in the market
Moses was coming down the stairs of the Bombay Stock Exchange
building after a rough trading session one rainy day and look what he
found peeking out of the false ceiling on the 10th floor landing,
written in the hand of God...
God entrusted to Moses the noble task of protecting the small
investor from the vagaries of the market and the attempts of various
vested interests to waylay them on their path to safe investing. Safe
investing, said God, was a mere matter of following these ten simple
rules.
Commandment 1: Don't attempt to time the market
Timing the market is no guessing matter. To the little investor,
timing the market is like taking a random walk. Most people only
recognise the correct path after already having set foot on the wrong
one. One exception to this is “bottom-fishing”, an approach to buy
stocks that you want in your portfolio at prices below the prevailing
levels. This entails biding your time and buying into a market downturn
before the others do (the age-old philosophy of buying low, selling
high). The downside of this approach being that the stock you want may
never see the downside you expect.
Commandment 2: Don't try to outguess the market
Market psychology is for shrinks, not for couch potatoes like we
humans. What captures the imagination of the market is transient. This
means that what is “in” today is “out” tomorrow. Most people only
recognise the pattern after it has become apparent to almost everyone
else and is too late to act upon. For example, if investment in
technology appears to be the current flavour, you are probably already
too late to cash in on the trend. In this instance, you should only
invest in technology as part of a long-term balanced approach.
Commandment 3: Treat investing like marriage--go for the long haul
Short-term investing could go either way. Invest for the long term.
Almost all market pundits and investment studies show that stock
investing should be part of a long-term strategy, lasting for five to
ten, or even 20, years or longer. Beware that not every year will result
in a positive return on your investment. However, over time the plus
will likely overwhelm the minus by a substantial margin.
Commandment 4: Almost always invest in blue chips and blue chips-to-be
Do invest in companies that are considered blue chips. These include
not only the BSE 100, but also the others that are slowly stepping into
the big league. Invest only in established companies with a good track
record. Beware that not every blue chip will rise after you buy it, and
that even these otherwise stellar performers will have their good
months/years and bad months/years. But over time, the fluctuations will
even out and you would be left with a considerable net plus. Also invest
in companies that have a good record of declaring dividends (and if you
find the solitary one that increases its dividend pay-out each
year...you know what to do).
Commandment 5: Prefer steady installment-like buying of stock to buying at one go
Investing should never be done in panic or be treated as an
emergency. Purchasing your favourite few is best accomplished at a
steady rate over time, so as to avoid the ups and downs of the market.
This is called rupee cost averaging and is one of the safest approaches
to investing. It works just like any other habit: you buy, regardless
whether the price is up or down, until you reach the desired number of
shares of that stock.
Commandment 6: Diversify, diversify and diversify
Do diversify your portfolio, both within your selected sectors and
within the overall industry. For example, don't invest in only
technology because it happens to be in vogue but consider the other
industries as well.
Commandment 7: No shopping with borrowed money and maintain a core reserve
Never use margin money to buy stocks. You should not invest money you
don't have. A simple and basic rule is to not leverage yourself to an
extent that when the tide turns against you, all you are left with is
nothing. You never know when a financial emergency might arise. That's
why you must keep a comfortable cash reserve in your savings account, so
you do not have to tap into your long-term investments. A reserve equal
to six months of salary should be just about ideal.
Commandment 8: Set realistic financial goals
Treat a 500% return with as much derision as you would a 5% return.
Decide what you need the money for: To retire early, to finance your
kid's college education or to fund your daughter's marriage or just to
preserve and build wealth? Whatever the goal you set, make sure it is
reasonable and attainable. Expecting too much will only lead to
disappointment down the road. Aim for an expected return level that is
realistic--not mediocre or overambitious.
Commandment 9: Leave your emotions behind
Finally, leave your emotions behind when you enter the world of investing.
Commandment 10: There are 10 more commandments
For those who thought that was the last of the 10 commandments I have
news. There's more. Ensure that your portfolio size is controllable (15
stocks is about ideal) and your stocks are well researched.
Checkpoints: Is the management quality above board? Does the company
have a positive cash flow? Does it have the capability to compete on a
global scale? Most importantly, is it shareholder friendly?
Follow the Ten Commandments. Time is on your side. Investment success
won't happen overnight, so stay focused on long-term returns and avoid
overreacting to short-term market swings. Remember, investment success
depends on time, not timing.
