By Jimeet Modi
The lure of big money always draws investors towards the stock markets. However, making money in the equity markets is not that easy. Apart from knowing the fundamentals of investing, one is also required to have a sound understanding of the market. If not, then instead of making any profit, your are most likely to incur losses in the market. Here we are taking a look at 10 strategies which will make you a winner in the stock markets:
1. Rome was not built in a day: Building a sound portfolio may even be tougher. It requires patience and adherence on the part of an investor. As Warren Buffet famously said, “The stock market is designed to transfer money from the impatient to the patient.” An investor needs to give time to his stocks to compound over the period.
A world-class company is built over the years and so is the wealth of an investor. An investor needs to develop the appetite to digest short-term disruptions. One needs to identify quality stocks and hold them tight. A recent report revealed that Rs 10,000 invested in Eicher Motors in 1992 has today reached the value of Rs 80 lakh. The same amount of investment in Asian Paints in 1986 and in HDFC in 1990 is today valued at Rs 90 lakh and Rs 1 crore, respectively. The examples cited underline the importance of long-term investment.
2. Chase the value: Phillip Fisher, the author of ‘Common Stocks and Uncommon Profits’, once said, “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Value creation is related to prospects of the company, sustainability of its products or services, the ability to generate capital to meet the future demand and its ability to implement technological innovations. The growth of a stock depends on its earning capacity to generate demand of its product/ services and the company’s ability to execute it. This approach requires thorough research and understanding of the business on the part of investors.
3. Invest in future: Market is always future-oriented. Hence it discounts the events of the future in the current price. Mature markets with stagnated products eventually phase out and are replaced by technically superior products with better features. Nokia which enjoyed the market leader position couldn’t capture the smart phone wave and ultimately lost out to technically superior companies like Samsung, Apple or Sony Ericsson. A value company will ride through these challenges and keep customers glued to their products. Nokia faded out from the market as it failed to capture the pulse of the future.
4. Analyze the past: If future is the bridge, it is based on the foundation which is made by the past. Without a strong foundation, a bridge cannot withstand the volatility! A strong growth in the past gives confidence for the future prospect. The goodwill of a company is built over years basis the growth achieved, asset base as well as the amount of debt kept in check. Strong past performance also reflects upon management’s credibility and build trust upon company’s ability.
5. Time the market: Finding a company worth investing in is like finding a pearl from an ocean! However, it is important to determine the correct price to enter the market. Stock before investing should be compared with its peers to determine price attractiveness. Company’s price to earnings ratio and comparison of current market price to its peers will throw a light on price attractiveness of a stock. It is extremely difficult to predict the future direction of the stock market. Hence volatility needs to be assessed on daily basis. As a result, for a value investor, it is important to stop predicting the price movement and stay invested for the long term.
6. Understand Yourself: The market does not operate for a single individual, instead operates for millions. Hence, it is subject to be extremely uncertain. As a result, before understanding anything or everything, understanding oneself holds a sparkling value. An individual should analyze his strengths and weaknesses in terms of the ability to handle risks and control one’s emotions. One must never forget, patience is the best virtue while investing.
7. Understand the Market: The market is made up of many components. It is not necessary for an individual to learn all the components, but it is of an utmost necessity that an individual learns the difference between all the components. One should not mix up the elements of trading with investment. If you are smart you will know that trading is for a shorter period, while investment will stay down with you as long as you want it to be.
8. Learn from Winners: Greatness is not just winning. It is picking up learnings along the way irrespective of the outcome. In the market, one is always advised to learn from the winners who have surpassed the normal limitations and the norms of traditional investment and trading to achieve incredible results.
9. Plan, analyze, and conclude: Prediction about the market does not work always. To become a successful investor or trader, one must first plan the trade/investment. Based on the plan, one must analyze the structure of the market and the company it plans to trade with or invest in. Analyzing trade or investment includes studying of the stock records, technical analysis of patterns and the time to buy or sell. Once an individual gets a hold of all these aspects of the market, they are ready to go forward to execute the trade.
10. Take Your Losses Quickly and Your Profits Slowly: There is an old saying that the first loss in the market is the smallest loss. The way to make trading decisions is to take your losses quickly and your profits slowly. Yet most traders get emotional at times. Many investors/traders make the mistake of continuing to stay invested in companies which are making loses with a hope that it will get better. This is a losing strategy. Whether it is investment or trading, one must be quick to take a decision when continuous loss is identified. One must positively accept that judgmental errors in either the timing or selection of stocks. This error is made by even the most professional traders also. So, it is better to understand losses more than profits, because losses will teach you how exactly should you play on the field.
(The author is CEO, Samco Securities)
