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SMART INVESTING
How
often we’ve dreamt of a magic formula which only George Soros and Warren Buffet
seem to possess, with regard to their wealth accumulation on the bourses. We as
investors have read many a book on their investment styles, psychology of
investing and what not so as to replicate even a small measure of their success.
But alas-there doesn’t seem to be a magic formula for success in the markets.
Well there may not be a magic formula, but if as an investor you choose to
follow some basic common sense principles mentioned below-you really will not go
wrong.
Rule
1- Make the
right choice baby
Buy a Winner, Own a Winner. That’s right. You don’t have to reinvent the wheel
to be an investor who makes money. By that I mean, you don’t have to find an
undiscovered stock to do well. Buying companies that consistently do well is a
good concept. Don’t take tips from your neighbor. Unless, of course, he is
qualified. But most of your neighbors aren’t qualified. Most likely your
neighbor is just repeating something he heard from someone else. Kind of like
the game whispering down the lane. We all know how that works. Yes, stories
change. Do your own research, or use a professional. Remember, the masses are
usually wrong. When all the pundits on CNBC say the market can only go lower
look for a turn up. By the same token, when everyone says the market is surely
headed much higher brace yourself for a correction. Pay attention to extreme
investor psychological levels in both directions as they usually mark both
bottoms and tops.
Do your research carefully It is not enough to look at the Price Earning Ratio
of a company. You need to look at the P/E Ratio versus the past, current and
estimated future growth rate. If a company has a P/E of 15 and is growing at 12%
annually, all things being equal, it probably will not do as well as a company
with a P/E of 20 which has a growth rate of 25%. Also diversification can save
your life…your investment life that is. This is the proverbial "don’t put all
your eggs in one basket," rule. We are not trying to gamble here; we are trying
to invest. Don’t put so much money in one stock that if it doesn’t work out it
will change your lifestyle for the worse. But also don’t over diversification
can give you a false sense of security. Most people don’t need to own more than
4 or 5 mutual funds to have maximum diversification. If you invest in multiple
mutual funds of the same type, large cap growth for an example, you will find
they will own many of the same issues. That is duplication, not diversification.
Don’t take large positions in illiquid securities. You don’t want to buy a lot
of stock in a company that doesn’t trade much or one that has a very small
float. When you go to sell your stock you could easily drive the price down. If
you get into a stock, make sure you will be able to get out of it.
Rule 2-Sell
the right stocks
Sell your losers and let your winners run. How many times have you sold a stock
that was up a few points while keeping one that was down? Guess what? Wrong
move. The stock going up is doing what you expected; the one going down is not
doing what you expected. Sell the loser! Not the winner. Also remember it is
better to average up than to average down. Stocks go down for a reason. If you
buy a stock and it goes down, why buy more? If you have a stock that is going
up, well, wouldn’t you want to own more of your winners?
Rule 3-Buy
and sell smartly
Consider buying when there is blood in the streets. Of course we don’t mean this
literally. But the historical fact is that the stock market goes up, the stock
market goes down and then the stock market goes back up. When the market has
been slaughtered there are always opportunities. Never buy a stock just because
it has a low price. Price can be one of your parameters, but it should not be
the only one. Buy stocks that you think will go up.
Also believe in the axiom - Buy…Sell Higher. People are use to hearing buy low
and sell high. You don’t have to buy low. You just have to buy stocks that you
think will be going up. That’s how you make money. Look for opportunities like
stock splits etc. or a dividend announcement along with the split which increase
scrip prices. Sometimes after a split, a stock will come down a little because
of a run up in price caused by the announcement. Look for the bottom, if that
happens and enjoy the ride.
If you buy on rumor. Sell on News. Many times the price of a stock will go up
because there is a rumor about a company. A rumor is different than a "story." A
rumor is based on fact. A story might not have any facts attached to it. Where
do these rumors come from? Who knows? But who hasn’t heard of the company that
has a drug with a scheduled FDA hearing and the thought is, they are going to
get approved? Or the buyout that is going to happen? Or the big deal that makes
sense for a company? If you are buying into one of these rumors, sell when you
hear the news, good or bad, most times you will be better off. By the way, if
the rumor never turns into an announcement, pick your time to sell. You bought
the stock for a reason. If the reason is not there…SELL
If you are an investor, don’t over trade. Investors do just that, they invest.
For the relatively long haul, at that. If you buy a stock for a reason and the
reason does not change and there are no mitigating factors. Hold the stock. But
please balance this out with the principle of marrying your wife (or husband),
and not a stock. Many people get caught up in one or two stocks or one or two
industries and hold them forever, even if they are holding on for dear life.
There are stocks that go down a lot and never come back. Divorce them.
While placing a buy order remember to place a limit your limit orders. If you
are an investor, the difference of an eighth of a point shouldn’t matter to you.
Putting in a limit order to buy could cause you not to get an execution on a
stock that you like and is moving up. If you want to invest in a company, invest
in that company, don’t leave it to chance. The same rule applies while
selling-don’t give stop orders that are too tight. If a stock has a normal
trading swing of 1 ½ points in a day, don’t put in an order to sell if your
stock drops 1 point from where you bought it. You could get "stopped out," not
because of a drop in the stock price, which was caused by something
extraordinary, but because of the normal price gyrations of the stock.
Rule 4-Watch
the trends
Stocks tend to move in groups. That’s why many stocks in the same sector like
technology, health care, or banking, as examples, move in the same direction at
the same time. You don’t have to look for a star in a sector devoid of other
bright lights. When possible, find your stars in clusters of other stars. In
case the company you have invested in does not meet up with the analyst’s
estimates remember they are just that estimates. Companies may earn
significantly more or less than analysts believe they will. It is more important
to watch the stock price performance heading into an earnings announcement than
to focus on what analysts are saying. You will often see a stock’s price run up
significantly BEFORE the company announces better than expected earnings.
The
secret of making money at the bourses doesn’t lie in buying low and selling
high, but a more an identification of what to buy and what to sell (where many
investors go wrong) and then buying or selling the same smartly-i.e.-at the
right time and price! |
