10 golden rules of investing in stock markets

19 Feb, 2013
Economictimes.com; Sanjeev Sinha

The lure of big money has always thrown investors into the lap of stock markets. However,
making money in equities is not easy. It not only requires oodles of patience and discipline, but
also a great deal of research and a sound understanding of the market, among others.

Added to this is the fact that stock market volatility in the last few years has left investors in a
state of confusion. They are in a dilemma whether to invest, hold or sell in such a scenario.

Although no sure-shot formula has yet been discovered for success in stock markets, here are
some golden rules which, if followed prudently, may increase your chances of getting a good
return:
1. Avoid the herd mentality
19 Feb, 2013
The typical buyer's decision is usually heavily influenced by the actions of his acquaintances,
neighbours or relatives. Thus, if everybody around is investing in a particular stock, the tendency
for potential investors is to do the same. But this strategy is bound to backfire in the long run.

No need to say that you should always avoid having the herd mentality if you don't want to lose
your hard-earned money in stock markets. The world's greatest investor Warren Buffett was
surely not wrong when he said, 'Be fearful when others are greedy, and be greedy when others
are fearful!'
4. Don't try to time the market
19 Feb, 2013
One thing that even Warren Buffett doesn't do is to try to time the stock market, although he does
have a very strong view on the price levels appropriate to individual shares. A majority of
investors, however, do just the opposite, something that financial planners have always been
warning them to avoid, and thus lose their hard-earned money in the process.

'So, you should never try to time the market. In fact, nobody has ever done this successfully and
consistently over multiple business or stock market cycles. Catching the tops and bottoms is a
myth. It is so till today and will remain so in the future. In fact, in doing so, more people have
lost far more money than people who have made money,' says Anil Chopra, group CEO and
director, Bajaj Capital.
5. Follow a disciplined investment approach
19 Feb, 2013
Historically it has been witnessed that even great bull runs have shown bouts of panic moments.
The volatility witnessed in the markets has inevitably made investors lose money despite the
great bull runs.

However, the investors who put in money systematically, in the right shares and held on to their
investments patiently have been seen generating outstanding returns. Hence, it is prudent to have
patience and follow a disciplined investment approach besides keeping a long-term broad picture
in mind.
6. Do not let emotions cloud your judgement
19 Feb, 2013
Many investors have been losing money in stock markets due to their inability to control
emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to
resist. Greed augments when investors hear stories of fabulous returns being made in the stock
market in a short period of time. 'This leads them to speculate, buy shares of unknown
companies or create heavy positions in the futures segment without really understanding the risks
involved,' says Kapur.

Instead of creating wealth, these investors thus burn their fingers very badly the moment the
sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell
their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when
investing, and it is better not to be guided by them.
8. Have realistic expectations
19 Feb, 2013
There's nothing wrong with hoping for the 'best' from your investments, but you could be
heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots
of stocks have generated more than 50 per cent returns during the great bull run of recent years.

However, it doesn't mean that you should always expect the same kind of return from the stock
markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure
dumb luck and you laugh at it, you're surely inviting trouble for yourself.
9. Invest only your surplus funds
19 Feb, 2013
If you want to take risk in a volatile market like this, then see whether you have surplus funds
which you can afford to lose. It is not necessary that you will lose money in the present scenario.
You investments can give you huge gains too in the months to come.

But no one can be hundred percent sure. That is why you will have to take risk. No need to say
that invest only if you are flush with surplus funds.
10. Monitor rigorously
19 Feb, 2013
We are living in a global village. Any important event happening in any part of the world has an
impact on our financial markets. Hence we need to constantly monitor our portfolio and keep
affecting the desired changes in it.

If you can't review your portfolio due to time constraint or lack of knowledge, then you should
take the help of a good financial planner or someone who is capable of doing that. 'If you can't
even do that, then stock investing is not for you. Better put your money in safe or less-risky
instruments,' advises Kapur.
Job: QA Automation Engineer at BitTorrent
8 Aug, 2014
A dwarf-killing giant lines up 10 dwarfs from shortest to tallest.

Each dwarf can see all the shortest dwarfs in front of him, but cannot see the dwarfs behind
himself.

The giant randomly puts a white or black hat on each dwarf. No dwarf can see their own hat. The
giant tells all the dwarfs that he will ask each dwarf, starting with the tallest, for the color of his
hat.

If the dwarf answers incorrectly, the giant will kill the dwarf.

Each dwarf can hear the previous answers, but cannot hear when a dwarf is killed.

The dwarves are given an opportunity to collude before the hats are distributed.

What strategy should be used to kill the fewest dwarfs, and what is the minimum number of
dwarfs that can be saved with this strategy?

Lesson 1: Adopt a disciplined approach to investments
7 Aug, 2014
If there is one thing that Narendra Modi lives by, it is his discipline. Come what may, he is
known for never moving away from his disciplined regimen.

This is a great thing to learn and emulate from our Prime Minister.

As an investor, if you have a systematic and disciplined approach towards investing, your
financial goals will seem more achievable. Chalk out an investment plan to meet the financial
goals you have in mind and invest accordingly.

One way to do it is investing in Systematic Investment Plans or SIPs that help you meet your
investment objectives over the long term.
Lesson 2: Do away with the clutter
7 Aug, 2014
As soon as Prime Minister Narendra Modi assumed office, he made it clear that he disliked
clutter of any sort and thus began the 'cleaning drive' beginning with the babus.

The Prime Minister even made it clear that presentations had to be succinct to bring out the
important issues to the forefront.

Similarly, when it comes to your portfolio, take care to see that it is not a collection of unwieldy
investments that are causing the clutter.

Ideally, there should not be more than 12-15 stocks in your portfolio. If your portfolio is too
large, see whether you require diversification and distribute your investments among various
asset classes.
Lesson 3: Underperformers should go
7 Aug, 2014
Modi has made it amply clear that he has zero tolerance for slack attitude. Each member of his
Cabinet and the babus are to be on their toes and on the top of things.

Otherwise, heads will roll, as he has clearly communicated. Your approach should be similar
when it comes to the underperformers in your portfolio.

Do not keep underperforming stocks in your portfolio forever. And the same holds true for
mutual fund schemes. If you find that a scheme is constantly underperforming, compared to its
peers as well as the benchmark, for over a year, use the first opportunity to sell out and deploy
the funds elsewhere.
Lesson 4: Ears to the ground
7 Aug, 2014
For the first time, we have a prime minister who makes his opinion or action clear on any issue
of national relevance on the social media platforms.

This shows that he is not just tech savvy, but likes to keep himself updated on all minor and
major issues of national and international significance.

This is a lesson an investor should learn from him.

As an investor, you should be cued in to what is happening across the markets and asset classes
to ensure that you can take relevant action when it is required.
Lesson 5: Be undeterred when need be
7 Aug, 2014
Modi is also known to be a leader who can take harsh decisions when need be, without worrying
about criticism, whether it is from within his party or from the Opposition.

He can do this because he believes he is in total control of the situation. Similarly, if you have
taken an investment decision after sound research, have the conviction to stand by it and do not
get swayed by the noise around you.

Meanwhile, small investors can certainly learn these lessons in money management from his
activity and personality traits.