Guide to investing in stocks

When investing in the stock market, don't follow the herd. Here are a few more useful insights...

woman with laptopLast year was one of the easiest years to make money for anyone who calls himself an investor. If you didn't make at least 100 per cent by investing in equities, you probably weren't doing something right.

From 0-2000 in an instant

Even if you had only invested in the Index at around 8,000 levels, you would have easily made over 100 per cent as it crossed 16,000. Our fund, for instance, followed a very simple strategy of buying stocks at the peak of the crash and sold them sometimes at prices that were 700 per cent higher from the lows. While the world and the media was talking about gloom and doom, we were buying.

Whenever I tell people such things, they seem shocked and surprised. But all those who have been investing in the markets for long, know that there are companies that change your financial situation almost instantly. The stock that gave us 700 per cent returns was a steel company.

There were a few companies which we missed, for instance, my close friend and an investor picked up Dairy company's share at Rs 6 and sold it at Rs 130. That means a return of over 2000 per cent in about a year! I'm not sure of the business model or fundamentals and might look into it whenever I get the time.

Signs to look for

When selling.

We have booked our profits on all the above positions. Unfortunately, many people who are not aware of how stocks markets work, will now be attracted to jump into a regular Mutual Fund or put their money in a ULIP [unit-linked insurance policy] to benefit from the stock market. The first sign that stock markets might correct in the short term is that a lot of common people try to rush into the market by looking at professionals who have been making money for several years.

When we sell, we are always on the lookout for buyers who will buy at these high prices. People see the wealth and newspaper headlines stating how the stock markets are rising every day and get attracted. Whenever stock markets rise rapidly, it is a sign that it is time to sell.

When buying...

A rise in Mutual Fund NFOs [New Fund Offerings] and aggressive pushing/sales of equity Mutual Funds by your financial advisor or banker is another sign that you need to get cautious. The best investments in life are not going to be advertised and pushed with heavy sales techniques. The investments that have really changed my financial future have always been the ones, which were not only ignored by the masses, but also the ones criticised by everybody around me.

For instance, I remember when I picked up a leading public sector bank at around Rs 13 in 2001; everybody around me made fun of me and told me how it wouldn't be able to face competition from fancy private and foreign banks entering India. I later went on to sell the same stock for around Rs 360.

About market correction

Look at the recent slew of IPOs, which hit the market [especially in the real estate sector], almost none of them have created any wealth for investors. A lot of IPOs coming out in a rush is also a sign that a correction is yet to come.

Promoters want to sell their holding at the highest possible valuation and that is why they rush in with IPOs. They are helped with heavy duty advertising, billboards and road-shows—all funded by the innocent investor's money. Not that all this is bad, it is just that history shows that every time a large number of IPOs are in pipeline, we experience a correction.

The party's not yet over

India continues to be one of the most lucrative places to invest in the world. There is no denying this fact from a long term perspective. However, today anybody who sees what is happening in the rest of the world will realise that when global economies collapse, Indian stock markets too will be affected in the short term. The world is yet to see the entire global financial crisis playing out. When trillions of dollars have been lost and unemployment is high in the western world, nobody can say the crisis is over.

As an Indian investor, why not wait a bit with cash and be ready to pounce on opportunities when the masses are selling in distress? You are sure to get some very lucrative deals that have the potential to reward you immensely.

When it comes to investing, don't be a monkey

Here's what you need to know to avoid becoming one.

Once upon a time, a man appeared in a village. He announced to the villagers that he would buy monkeys for Rs 10. Seeing that there were many monkeys in the forest, the villagers started catching them.

The man bought thousands at Rs 10 and as supply started to diminish, villagers too decreased their efforts. Then the man announced that he would buy at Rs 20. The villagers started catching moneys with renewed vigour.

The supply diminished further and people started going back to their farms. He then increased the rate to Rs 25. The situation was such that now it was a feat to even see a monkey, let alone catch one. The man now announced that he would buy monkeys at Rs 50! Since he had to go to the city on some business, his assistant would now buy on his behalf.

In the absence of the man, the assistant told the villagers. "Look at all these monkeys in the big cage. I will sell them to you at Rs 35 and when the man comes back, you can sell it to him for Rs 50." The villagers queued up with all their savings to buy the monkeys.

After that day, nobody found either the man or his assistant, only monkeys and monkeys and monkeys...

I am sure many of you are familiar with this story, but it makes sense to pay attention to it—especially if you are new to investing. The stock markets are a great place to make money; they are an even greater place to lose money if you don't understand the inside workings.

New investors are constantly offered 'hot tips' about how a stock, which is barely at Rs 8 now, will touch Rs 800 in the next year. They get misled by rumours and wrong information spread around by unethical people.

Transparency and protection of investor rights is always welcome, but more than that, I feel investors need to invest in knowledge first. If more investors knew and spent some time learning, a large part of their risk will reduce.

Investor education doesn't mean spending ages to study something, but it means learning the basic principles of the game of investing. Don't take everything you read or see on the internet at face value. Analyse it and study the motives behind it.

To win any game, you need to know the rules. Still, so many people invest blindly just based on rumours and tips. Instead of feeling bad and sorry, wouldn't it be better if you empowered yourself with knowledge?

Nobody can make you buy overpriced monkeys if you are intelligent and have knowledge. I hope that more retail investors are empowered and continue creating wealth in a sustainable manner. The stock markets are a great place to create wealth—if you enter it armed with knowledge.

Magnifying lens over an exclamation markSpot an error in this article? A typo maybe? Or an incorrect source? Let us know!

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