Investing does not have to be
complicated and it should not be exciting either. Putting your hard-earned
money to work in the financial markets is all about helping you get what you
want from life while making sure you can sleep easily at night. It is not about
riding roller-coasters.
To invest, you need to draw up
a clear plan, do your own research, build in a margin of safety by always
thinking about the valuation and, ultimately, be patient. By all means include
some speculative picks if you wish, but ensure they are only a small part of
your portfolio. Looking for an oil explorer whose shares double, treble and
double again is exciting but such firms are very rare. There are a lot more
which have a consistent record of paying out the dividends which really make
the markets work for you, once they are reinvested.
The trick is how to select the
picks which best suit your investment goal, target returns, appetite for risk
and time horizon. These 10 golden rules summarise entire guide and they should
help everyone spot profitable portfolio picks and also escape likely failures.
1.
Have a plan
The financial plan of every
investment is the tool that maximizes your potential profit and minimizes risk.
Depending on how fast you need make a decision and how complex your investment
is, you can elaborate a detailed and accurate plan or simple plan. Before you
put any cash to work, you must know what you are investing for. This will
condition your target return, time horizon and appetite for risk and therefore
the asset classes best suited for your aims.
2.
Never invest in something you do not understand
Peter Lynch of Fidelity was
one of the most successful fund managers ever, and he said he never touched
anything he could not describe on one sheet of paper with a crayon. You will be
angry with yourself if you lose money on something and cannot explain why.
Stick to what you know and always do your own research. You can’t manage or
improve something that you don’t fully understand. So before you start, gain
knowledge about the subject of your investment.
3.
Diversify your portfolio
“Never put all your eggs in
one basket”, if the basket falls, you have no eggs left for breakfast. Same
applies to investments. Diversify between debt and equity and even further
within those. Invest in Mutual Funds and some direct equity if you are inclined
towards equity. For debt too, choose bank FDs, Debt Mutual Funds, balanced
funds, FMPs etc. Diversify. Also you can look at Gold, Silver, Real Estate, if
you have the funds. If one investment class doesn’t work, the other will
support it.
4.
Respect the market
Stunning rises and huge
crashes show that markets are not efficient, but you must respect their views.
When you buy or sell something you are saying the market is wrong, so you need
to have a good reason why.
5.
Start with something small
There is one great strategy to
start with. Start with a simple investment. Treat it as a testing ground. See
how your rules work. Draw conclusions. Make adjustments. Improve. And then
prepare for bigger profits. The earlier you start, the faster you will be
reaping the benefits.
6.
Go against the herd
Punters go skint backing
favourites on the horses, and although it may work in the short-term, purely
following hyped, momentum names can be dangerous. To get the best long-term
returns you will eventually need to sell what everyone is talking about and buy
what is being ignored – providing the valuation is right and growth, risk and
quality checks are met.
7.
Cash is king
Profit is a matter of opinion;
cash flow is a matter of fact. Some unscrupulous managers will try and dress up
their profits but they cannot fiddle cash. Accidents happen when companies look
profitable but generate little cash so focus your research here when looking at
individual stocks.
8.
Dividend reinvestment is vital
Patient portfolio builders
should focus on firms with a strong competitive advantage and a good reason why
clients want to pay for their goods or services. This confers the pricing power
that enables companies to generate cash and pay the dividends that really get
your savings to tot up over time. There are many funds dedicated to such firms,
too.
9.
Never invest money that you can’t afford to lose
This parameter of your
investment protects your business against losses too big to handle. Your
business should run smoothly and be managed evenly and rationally. Investment
business is certainly not about gambling. It is about gradually multiplying
your assets.
10.
Focus on value, not price
Prices are temporary, but
values are eternal. Prices usually depend on values. If you are able to
recognize the real value of your investment, then you will never pay too much
or too less. Prices are often a matter of speculation, while values are built
on passion and dreams to make a difference. Most of the time it’s good to
ignore facades, diligently prepared by PR agencies and know what goes on
backstage. e.g. you would not enter a restaurant and buy a pizza regardless of
whether it cost Rs. 50, Rs. 100, Rs. 200 or more. You would use your judgement
to decide what is good value, and the same discipline must apply to financial
investments. Several simple metrics, in the context of growth, risk and
quality, will help you decide whether a valuation is cheap, expensive or about
right.
Do you have any specific
principle of investment that your follow? It will be interesting to share your
views, leave your thoughts in the comments below.
