Thread by @finkarmaIN

TEN INDISPENSABLE COMMANDMENTS FOR ALL STOCK MARKET PARTICIPANTS

Time tested lessons for a less painful stock market journey

A thread

#StockMarket #investing #tradingpsychology

1/ “An investment in knowledge pays the best interest.” Benjamin Franklin

It’s true that more than 90% of retail traders/investors have been losing money in the stock market. Even highly educated people, who did great in the other fields, are losing money in the markets

Major reason for these losses is the lack of knowledge about the investments they make.

People will do a lot of research and bargaining before buying a 100 rupees stuff but will blindly make huge investments in the stock market, many times just on the basis of news or hunch

For serious starters, books are the cheap and best source to begin with.

An experienced and good mentor can also improve your learning curve. But it’s true that you will still make mistakes and learn from those mistakes

2/ “With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.” Carlos Slim Helu

Before investing in any stock or group of stocks, it’s better to run thorough research about the business performed by those companies

At least you should the sector they belong to so that you can have an idea about the future aspects of the parent group.

Have a little sneak peek into the earnings growth of the company. One can anticipate a better future if there is a good performance in the past

Also evaluate the other financial aspects such as Debt to Equity ratio; Price to Earnings ratio (PE); Dividend Yield, etc.

Generally, debt-free companies with relatively lower PE ratios are better for investment

Very long-term investors should look for, in addition to the above, consistent and high dividend-yielding stock which can generate added returns over a long period of time

Knowledge about technical analysis can provide an edge to investors.

You would precisely know the important value zones where institutional investors are interested in buying and selling.

Waiting patiently for those levels before taking an entry or exit can save you a lot of time and value

3/ “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffett

It would never be a better idea to trade like the 90% losers. If you want to make money you will have to trade against them

It’s better to buy when the herd is selling in panic and sell when the herd is getting greedy.

This is a time-tested method but needs a lot of patience to wait for high probability opportunities. Only the patient ones can make money in the stock market

4/ “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” Warren Buffet

Predicting market tops and bottoms is the most painful thing to do. As markets may remain in a trend or consolidation for much longer than you can expect

Keeping realistic expectations from your investments would not only help in avoiding such predictions but also in building your capital.

Booking profits at preconceived targets would enhance your win rate and bring confidence to your trading

Remember that preconceived targets for an investor would be much higher than a short-term trader.

Some investors like to adopt an open target approach but, in that case, they keep on trailing their stop-losses higher, as the stock moves up, so that they can catch the whole juicy part of the trade

5/ “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Phillip Fisher

Traders want to become rich overnight. They opt to buy small-cap stocks because they look cheap.

They buy a huge quantity thinking that there is more room to make profits

This is normally seen in stocks that have historically traded at much higher prices.

The investors don’t understand that the stock has been trending down to such a low price because of some valid reasons

The reasons are perhaps unknown to retail traders but known to well-informed institutional players and insiders.

Never average such stocks. Averaging, in this case, would only hurt your portfolio to a greater degree

6/ “The secret to investing is to figure out the value of something – and then pay a lot less.” Joel Greenblatt

Let us say you are going to buy a used car. You would like to know its model; condition of engine and tyres; registration details etc

You would definitely search for that model in the market for a better bargain and then you will make your decision to buy it

While investing in stocks also you should collect the perspectives that reveal the intrinsic value of the company.

Then you should patiently wait for a better current market price which needs to be lower than the intrinsic value of the stock

Fundamental analysts use various models such as Dividend Discount Model; Residual Income Model; Discounted Cash Flow Models etc. to calculate the intrinsic value

On the other hand, technical analysts look for oversold and overbought conditions to assess if a stock is cheap or expensive. If a stock is overbought on the charts, it is considered expensive and if is oversold on the charts, it is considered cheap

Although every model has its own limitations yet your decision to buy at a price lower than the intrinsic value would reduce the downside risk compared to a situation when buy decision is made at relatively higher market price

7/ “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” George Soros

An investor needs to assess his financial condition and set the goals accordingly

The investor needs to set a goal that is feasible. It does not have to be aggressive like doubling or tripling the available capital within a short span of time.

Rather the goal should be to make consistent profits over a long period of time

There is a general rule, the profit target should be at least double the risk involved.

This simply means that you will make double what you can lose on any trade. This simple principle can keep you in-game for a much longer time

Your returns have a strong relationship with your risk appetite.

A high-risk appetite has a potential for higher returns and thus beating inflation. If you are investing in stocks, then it reflects that you already have a higher risk appetite

Parking your money in very low-risk instruments such as fixed deposits won’t beat inflation and thus reduce profit potential or return on investment

8/ “Wide diversification is only required when investors do not understand what they are doing.” Warren Buffett

If you are investing in stocks, then its neither wise to invest the entire capital in just one or two stocks nor to park it in a group of fifty stocks

The former would be the riskiest bet as chances of bad investment are higher; it may also lead to overtrading due to too much focus on just one stock, whereas the latter may become too complicated and difficult to manage as your limited span of attention may lead to poor returns

On average, a retail trader may diversify in 10-15well analyzed companies.

Investors should keep in mind that even a well-diversified portfolio will be at risk if the stocks are from the same sector or extremely correlated.

Therefore, it’s prudent to diversify in various sectors which are not highly correlated

At the same time rebalancing your portfolio, to set-off cyclical effects, would be advantageous as it will plough back your profits.

It would keep a check on over-weightage to a couple of stocks in the portfolio and hence keeps your portfolio at least risk

9/ “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” Adam Smith

A long-term financial goal of an investor can only be achieved in a debt-free environment

Borrowing money from friends and relatives or redirecting business loans to trading would add both financial as well as psychological pressure to the investors

It is advisable that -- only surplus funds should be used for investment purposes; keep emergency funds for the future to keep you away from any debt requirements; and pay all high-interest debts, if any, before you even think of investing in the stock market

10/ “Investing should be more like watching paint dry or watching grass grow.” Paul Samuelson

Patience is the key to investments.

The analysis is important but what ultimately pays is your control on emotions to keep the trade as long as you can, when it is in profit

Generally, investors hold losing trades for a longer period of time than a winning trade.

Rather it should be the opposite. Traders need to be impatient with a losing trade and highly patient with a winning trade

Getting emotionally attached to stock is an indiscipline approach.

With this approach, even one or two underperforming stocks may drag down the profits generated from the entire portfolio

So that’s it for today

Stay tuned @finkarmaIN for more such writeups in the coming days

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Thanks for reading