| How to Invest in Stocks? |
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Stocks are an asset class. The basic property of an asset class is to grow. Then why investors loose money?
May be a wrong time to ask the question as Indian stock markets are in for a never seen before Bull Run. Still I found this topic the most relevant today. The SENSEX has crossed 8000 points. In my articles at http://www.mumbaibull.com/nifty_trends.asp I had discussed why Indian stocks are so attractive and why NIFTY has all chance to make it to 4000 in few years.
When markets declined from 6900 levels to 6300 levels in recent past, everyone panicked and started talking about SESEX below 5000 (Even top TV channels). In my article at http://www.mumbaibull.com/willthemarketsfallfurther.php , I suggested the investors to buy without panic.
What should you do when markets run like today's scenario? Should one book profits? Or should they add on to their holdings? Or should they come out of the markets completely? What should a new investor who is starting to know about stocks do now? (I get whole lot of enquiries from these kinds of guys)
The answer is simple. Forget about market conditions. Forget about index values. Look at stocks as buying business.
Say if you are buying a pharma stock. Instead of thinking whether to buy 100 shares of RANBAXT / CIPLA / PFIZER or not, think if you had cash and if the company Ranbaxy was for sale would have considered acquiring it?
What you would have done?
- You would have looked at sales
- You would have looked at Profits
- You would have seen the growth in sales and profits
- You would have seen how long would it take to get back your money from profits. (How many years)
- You would have seen the problems that may come future.
- You would have seen what is the real worth of assets and how much you are paying against it.
- Many small aspects are very important but most of it is reflected in the above points.
I think all of you agree that you will look into all these aspects instead of looking for tips to buy a business or taking decisions based on rumors.
Apply the similar rules when buying a stock. Just change the facts from gross to per share basis.
Instead of total sales, look at per share sales, instead of net profits look at earnings per share. Instead of net worth look at Book Value of a stock. Look at the past history of growth in sales and EPS. So on..
You should know that SENSEX has come from 1000 levels to 8000 levels today. Each time it made new highs, analysts cautioned investors. Although SESEX rose from 1000 to 8000 in 15 years or so, many brokers/investors/analyst/trader/speculators lost huge money and vanished from markets.
I am sure that SENSEX will reach new tops. You will only see SENSEX reaching 10000, 12000, and 15000 sometime down the line. Mind it stocks are asset class. It is not a zero sum game like a lottery where someone has to loose for someone to win. It is not a gambling den.
To make money in asset class, you need to invest. Invest wisely. Invest in sound assets. Invest in undervalued assets.
In this way, when SENSEX makes a next journey from 8000 to 10000 (a 25% return), your wise pickings should give you a return of 50 - 100%. Learn to leave speculative bets, which may rise from Rs 10 to Rs 50 in few months, which has the potential to become a penny stock that will trade at Rs 0.50 after few years for safe bets, which can rise from Rs 100 to Rs 150 in 1 year and has very little downside. (May be 10-15%)
- Plan your investment. Decide on what strategy you invest. Believe in your strategy. Make lots of paper work.
- Do not over diversify your holdings to too many stocks and industries.
- Be slow and steady. There is always a tomorrow. It is never too late to make a start.
- Never start investing in stocks without understanding. Be sure what you are doing. Know about potential risks. I see too many people jumping in to markets when there is Bull Run and getting out of it in bear markets. Usually I see people enter a stock when it is almost at its top value and exit in fear at the near very low quote of it.
All the best.
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