Today Sensex is at All time high of ~42000. It has rallied 420 times from 100 in 1979 to 42k, a cool CAGR of ~16% over a span of 40 years. Still currently only 2% of Indian's invests in stocks. That's a very small number compared to developed countries.
The probable reasons are:
1. Lack of understanding
2. Additional effort that needs to be put to track stocks
3. Impression of stock market being a gamblers den, etc.
Leave apart the non finance folks, unfortunately I have seen many MBA-Fin who don't want to make their hands dirty in stock markets or take an effort to understand Mr. Markets. I think stock market is the best place to apply your finance knowledge/ skills, be it MBA, CA, CFA, etc. but unfortunately people consider FD's and insurance to be better investment products (Insurance is not an investment product, it's something which insures you against unforeseen events). So for a starter who has basic knowledge in finance, how to get started ?
How to approach markets:
Each one would have his own story of how they started in markets and you can try what suits you. The way I started is by reading books on markets. The best book to start with (and recommended by many investment gurus) is Peter Lynch's: 'One Up on Wall Street'.
This book provides you with approach on how to pick up stocks, what works and what doesn't and is easy to learn and digest for a beginner. I have personally read it 4 times & each time I learn new things I can apply to markets.
Another one on top of my list is Basant Maheshwari's 'The Thoughtful Investor'.
(This one is for 1500 bucks but worth every penny, you can sacrifice a Friday night drink and instead buy this one :) ) He is a role model for many and has a great command on his style of investing. (Had a chance of meeting him at Hawkins AGM in 2013).
But does reading too many books increase chance of becoming a successful investor. No, simply reading them wouldn't make you a good investor. Why ? Simple.. you also need to apply what you have learnt. Also many of these books though have timely wisdom, Indian market is a different ball game all together as compared to a developed country like US with some many time bombs as government is focused on 98% of population who doesn't invest !!
How should one go by applying this bookish knowledge ? Simple .. burn some money. As Warren Buffet says.. 'Ship is always safe ashore, but that's not what it is meant for'
Each one would have his own story of how they started in markets and you can try what suits you. The way I started is by reading books on markets. The best book to start with (and recommended by many investment gurus) is Peter Lynch's: 'One Up on Wall Street'.
This book provides you with approach on how to pick up stocks, what works and what doesn't and is easy to learn and digest for a beginner. I have personally read it 4 times & each time I learn new things I can apply to markets.
Another one on top of my list is Basant Maheshwari's 'The Thoughtful Investor'.
(This one is for 1500 bucks but worth every penny, you can sacrifice a Friday night drink and instead buy this one :) ) He is a role model for many and has a great command on his style of investing. (Had a chance of meeting him at Hawkins AGM in 2013).
But does reading too many books increase chance of becoming a successful investor. No, simply reading them wouldn't make you a good investor. Why ? Simple.. you also need to apply what you have learnt. Also many of these books though have timely wisdom, Indian market is a different ball game all together as compared to a developed country like US with some many time bombs as government is focused on 98% of population who doesn't invest !!
How should one go by applying this bookish knowledge ? Simple .. burn some money. As Warren Buffet says.. 'Ship is always safe ashore, but that's not what it is meant for'
Burn some money:
Wait, don't literally burn it. You need to put in hard cash into the market to get serious with it. People start paper trading/investing and that is the reason they don't take things seriously because paper losses don't pinch you. I have personally burnt my hands trying various things (Technical analysis, tip based trades, following so called gurus on Twitter, Futures and options, etc.) only to realize what investing methodology suits me. It's very important to make mistakes early in your investing journey when you have smaller capital deployed (imagine going down 80% on capital of 1 lac vs on a capital of 1 cr). Over your journey in stock market, you would keep on learning new things daily... Identify what suits you the best and not blindly follow what XYZ guru is doing.. remember 'You can borrow ideas but you can't borrow conviction'.. as Thomas Phelps says 'To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them; And Patience is the rarest of the three' And with the volatile nature of stock market, you can 'sit' tightly holding onto your winner only if you your own conviction. Well then the natural question that comes to our mind is that how long we should we should keep on burning cash ?
Wait, don't literally burn it. You need to put in hard cash into the market to get serious with it. People start paper trading/investing and that is the reason they don't take things seriously because paper losses don't pinch you. I have personally burnt my hands trying various things (Technical analysis, tip based trades, following so called gurus on Twitter, Futures and options, etc.) only to realize what investing methodology suits me. It's very important to make mistakes early in your investing journey when you have smaller capital deployed (imagine going down 80% on capital of 1 lac vs on a capital of 1 cr). Over your journey in stock market, you would keep on learning new things daily... Identify what suits you the best and not blindly follow what XYZ guru is doing.. remember 'You can borrow ideas but you can't borrow conviction'.. as Thomas Phelps says 'To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them; And Patience is the rarest of the three' And with the volatile nature of stock market, you can 'sit' tightly holding onto your winner only if you your own conviction. Well then the natural question that comes to our mind is that how long we should we should keep on burning cash ?
Learn from mistakes of others:
You need not make all the mistakes on your own to learn things. Here as well Google comes to our rescue. There are many folks who post about their own mistakes on Twitter, blogs, websites, investing forums, etc. Learn from them. The most important thing is to learn from mistakes (your own & that of others) and ensure you don't repeat the same. Always keep this in mind that each loss that you encounter is a 'Tuition fee' that you pay to Mr. Market. Your job is to ensure that you shouldn't pay the tuition fee again for the same learning.
You need not make all the mistakes on your own to learn things. Here as well Google comes to our rescue. There are many folks who post about their own mistakes on Twitter, blogs, websites, investing forums, etc. Learn from them. The most important thing is to learn from mistakes (your own & that of others) and ensure you don't repeat the same. Always keep this in mind that each loss that you encounter is a 'Tuition fee' that you pay to Mr. Market. Your job is to ensure that you shouldn't pay the tuition fee again for the same learning.
Follow those who have made it big:
As in life where you have role models, you should also have roles models in market. Be humble and listen to folks who have made money in markets in the long run. Bull markets gives one a feeling that you are king of the market and you understand each and everything. Bear markets makes one humble, that's when you understand the importance of knowledge people gain across cycles. Join various investor forums, stock market blogs where experienced folks post their knowledge about stocks or markets in general.
As in life where you have role models, you should also have roles models in market. Be humble and listen to folks who have made money in markets in the long run. Bull markets gives one a feeling that you are king of the market and you understand each and everything. Bear markets makes one humble, that's when you understand the importance of knowledge people gain across cycles. Join various investor forums, stock market blogs where experienced folks post their knowledge about stocks or markets in general.
There is no substitute to hard work:
You need to work hard to understand the stocks which one buys. Do as much research while buying a stock as you do while buying a cell phone or a TV or a car. As Peter Lynch says: 'There is a company behind each stock, try to understand what it does'. For starters try to invest in proven businesses (companies that you come across in your day to day life) like HDFC Bank, Bajaj Finance, Asian Paints. Investor presentation of companies is available in the Investor section on their websites (e.g. Google Bajaj Finance investor presentation or if you are too lazy check it out here). This is a great source to start understanding what the company does, how is it performing. Then there are quarterly conference call transcript/recordings available as well there which you can read. Annual reports can help you guage the long term plans of company. Then you should follow quarterly results declared by the company. Too much work is it ? Like I said earlier, don't expect to be successful in stock markets without putting in hard work.. Finally it's your hard earned money that you are putting in. Understand that it's earnings that drives stock price returns in the longer run. (btw all this information is available free of cost on BSE, NSE, company websites, Moneycontrol, etc.)
You need to work hard to understand the stocks which one buys. Do as much research while buying a stock as you do while buying a cell phone or a TV or a car. As Peter Lynch says: 'There is a company behind each stock, try to understand what it does'. For starters try to invest in proven businesses (companies that you come across in your day to day life) like HDFC Bank, Bajaj Finance, Asian Paints. Investor presentation of companies is available in the Investor section on their websites (e.g. Google Bajaj Finance investor presentation or if you are too lazy check it out here). This is a great source to start understanding what the company does, how is it performing. Then there are quarterly conference call transcript/recordings available as well there which you can read. Annual reports can help you guage the long term plans of company. Then you should follow quarterly results declared by the company. Too much work is it ? Like I said earlier, don't expect to be successful in stock markets without putting in hard work.. Finally it's your hard earned money that you are putting in. Understand that it's earnings that drives stock price returns in the longer run. (btw all this information is available free of cost on BSE, NSE, company websites, Moneycontrol, etc.)
Don't follow stock prices daily:
You would have heard stories of people who have purchased real estate and held onto for 20 yrs or more and made 100x returns. Will the same folks hold onto a stock for such a long period of time ? Very rare possibility. Why is that ? Two major reasons i believe:
You would have heard stories of people who have purchased real estate and held onto for 20 yrs or more and made 100x returns. Will the same folks hold onto a stock for such a long period of time ? Very rare possibility. Why is that ? Two major reasons i believe:
1. Ease of price discovery
2. Ease of transaction
Had real estate quoted so frequently as and it would have been so easy to transact with minimal transaction costs, chances are people would have traded intraday in real estate as well !!
One thing that you should try is not to follow stock prices daily. This will help you increase your holding period which by all chances will also increase your returns. Why ? It reduces the volatility. Look at below chart of a stock, over longer period of times, the volatility smoothens out. If you follow prices daily or intra-day, you would have panic attacks with 10-15% drops and you would have exited the position long back.
Don't bet your house on a lifetime idea:
No matter how much one says that ABC company will be the next Infosys, don't sell your house to bet on the stock. Remember.. 'Market can stay irrational longer than you can stay solvent'
No matter how much one says that ABC company will be the next Infosys, don't sell your house to bet on the stock. Remember.. 'Market can stay irrational longer than you can stay solvent'
Get started right away:
You may think that the market has rallied so much, what's the point entering now ? Let's wait for a fall and I will then bet 5 lakhs on the market to start off with; Believe me, it will never happen. You will wait for 10% correction and when it comes, you would wait for further 10%. This cycle goes on. Start by investing smaller amounts you can afford to loose, start getting a feel of market, you would soon fall in love with it.
You may think that the market has rallied so much, what's the point entering now ? Let's wait for a fall and I will then bet 5 lakhs on the market to start off with; Believe me, it will never happen. You will wait for 10% correction and when it comes, you would wait for further 10%. This cycle goes on. Start by investing smaller amounts you can afford to loose, start getting a feel of market, you would soon fall in love with it.
Planning to do a series of blog posts on varied topics in stock market and personal finance. Would appreciate feedback and suggestions.
P.S: For single folks out there who don't have any hopes for upcoming valentine's day, open a demat account using the money that you would have used to buy gifts for the imaginary special one :). You won't regret it for life..
P.S: For single folks out there who don't have any hopes for upcoming valentine's day, open a demat account using the money that you would have used to buy gifts for the imaginary special one :). You won't regret it for life..
Disclosure: I am not a SEBI registered advisor. The content in this blog are academic in nature, please consult your investment advisor before taking any investment decision; I may have position in stocks discussed on the blog
A good simple way of writing Rohit ....simple things can be digested well !
ReplyDeleteYes and as you said if invested in small amounts you will fall in love with the market ( " so called problem " :D )
Thanx for the blog .
Thanks a lot
DeleteA good simple way of writing Rohit ....simple things can be digested well !
ReplyDeleteYes and as you said if invested in small amounts one would fall in love with the market ( " as a famous saying goes 'fall in love with the " so called problem " :D and the fear vanishes' )
Thanx for the blog .
Very nicely explained .one has to start to see and feel the happyness of money working for you to earn money.
ReplyDeleteNice Article Rohit..can you write a blog on how to generate capital from momentum / trading portfolio to invest for the long term core portfolio..it will be helpful for retail investors like us due to the capital constraints.
ReplyDeleteSure, I have one of the articles lined up on how to generate capital to invest.
DeleteWow. Nice one Rohit. My best wishes for you
ReplyDelete