Overview:
Investing is the most misunderstood concept in the financial world. Whenever I talk about investing with my friends and relatives, they confuse it with trading. Trading and investing are not related to each other. Believe me, you are not going to get bankrupt investing in good quality stocks. Nonetheless, trading derivatives on margins can get you into serious trouble if done without proper knowledge and expertise.
Investing does not mean just putting money in the stock markets buying and selling stocks. Investing means spending your savings (the money that is intended for future uses) in the present for purchasing assets. You are willing to sacrifice your future spending today for extra income.
Mostly, investing involves buying assets. Again, I have a question for you. What is an asset? Based on what was taught in our schools, we think a car is an asset. But it isn’t true.
As American businessman and financial writer, Robert Kiyosaki says, “An Asset is something that puts money in your pocket”. It is up to you to understand whether your brand new sedan that you might have bought at 10% interest per annum and paying EMIs every month is an asset or a liability.
My experience as a new investor:
Four years ago when I started investing, I had no prior knowledge. So I invested in the top 5 mutual funds in India. The irony is that all are blue-chip mutual funds, which made investments in the same companies. If I had put all my money in a single mutual fund, it would have been less work and lower expense fees.
Whenever the stock markets fall, my portfolio also showed losses. Since I had no experience, I was afraid of losing all my money invested in the funds. Most of you would be confused with stock markets keep falling, why should we have to continue your monthly SIPs in mutual funds? That’s the reason I say, improve your financial literacy.
As of now, my portfolio is down 10%, thanks to the coronavirus crash. But I am not panicked now. Since I am full-time into stock markets, I can withdraw whenever I feel the markets might crash again. It is not the case with an ordinary investor who invests in mutual funds. By the time you get to know about the stock market crash, your portfolio would have already taken a hit.
The five traits that every new investor must possess:
1. Patience:
As far as I am concerned, patience is the most important characteristic required for an investor. As legendary investor Warren Buffett says, “The stock market is a device for transferring wealth from the impatient to the patient.” Many new investors make a mistake of checking their portfolio daily, either worrying over their stock prices falling or feeling euphoric over the prices rising. In the long term investing, it is normal for any stock to fall by 50% in your portfolio. If you are afraid and sell the stock at a 50% loss. You would be making a big mistake. It does not mean buying a poor stock and holding forever. Likewise, never put your hard-earned money in getting rich quick schemes.
2. Knowledge of your investment:
Never believe anyone with your money when it comes to investing. Even if you follow an analyst or financial adviser, it is your job to know about your investment. Whenever your analyst asks you to sell the stock from your portfolio, make sure to ask what’s the reason. Don’t invest just because someone has asked to do so. Always have the purpose of your investment. It may be for a child’s education or buying a new house.
If you have a clear idea of the purpose and tenure of the investment, you can be calm and pleasant. Go through the financial statements of the companies once in a quarter. All the listed companies release their quarterly reports. Make sure you have a clear idea of Investing Vs Speculation.
3. Confidence:
Do your research on which stocks to invest and stick to the stocks. Learn about the business in which you are investing. If you want to invest in a restaurant business, wouldn’t you learn about the customers and locality? Investing is similar to owning a business. As long as you do the basic research on the company you want to invest in, you will be confident. If not, you will be prone to the panic attacks every time stock markets crash or when your stock price falls. Believe me, I used to trade naked options, even though I know the price is going to rise or fall, I had those heart attacks every time the price went the other ways. So I always ended up exiting at minimum profits.
4. Stay away from hot stock tips:
Recently, I had a conversation with one of my friends. He has been trading for a few months. I asked him how does he pick stocks. He said, “I watch business TV channels and follow some websites.” Most of the people who think they are investing in stock markets are just trading stocks on some anonymous person calls. Yes, you may make some profits for a few days. But there comes a day when you may lose all of the money made trading on those calls.
Just ask yourself, why does anyone provide you calls on the stocks? If he is certain of his information, he would trade himself. There is no need to share his secret recipe for making money with you for ₹2000/- or ₹3000/-per month. This is equally important for investing; do not buy shares just because some TV channel says so or a famous investor has it in his portfolio.
5. Have a backup plan:
No matter how good an investment you made or confident you are of the investment, you must always have a backup plan. Ask yourself the following questions.
- What if my investment is a complete failure, how much would it impact my routine life?
- Have I invested my own money or borrowed money?
- What is the price at which I am willing to exit out of the stock? It is not guaranteed that a good stock can go increasing in value forever. Here’s my article comparing two blue-chip stocks.
- Do I know the difference between investing and speculating?
- Do I possess enough cash for needs and wants after investing?
That’s it buddies, if you are patient and confident with adequate knowledge of your investments, you will succeed in long term investing. Also, stay away from hot stock tips and always have a backup plan.
Note:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online.
