Stocks are among the best ways to build a person’s wealth and networth. Few other strategies or methods work as successful as long term investing.
I was having a conversation with my friend’s brother yesterday. He was looking for few tips to succeed in the stock market. He has been in the stock market for nearly 1.5 years but had not seen much growth.
I asked him how much he has made so far. “Not much Brother!”. If one was an investor and started 1.5 years ago in Indian stocks he should have made some really good profits. Why?. Because 15 months ago was one of the best times to invest in India.
There was lot of gloom and doom in the Indian stock market then. In last 8 months,we all know how the tides have turned and risen after the new Modi government was formed in May2014. So I just asked him two questions.
1. How many times do you trade?
2. Are you dealing in Futures and Options?
The reply was “I trade daily . I’m doing through Options. Whatever profit I make in other trades is lost in 2 or 3 trades. So am pretty close to the initial money I started with”.
I was somewhat expecting this reply and so was not surprised. I was sure he was trading frequently. But din’t expect him to have started trading in derivatives so soon.
These are typical mistakes which almost every investor does in early stages. Lucky that markets were on an uptrend. This has prevented him from suffering much capital loss. Here are some tips I gave him to succeed long term in stock market.
Definite Read: How to choose high quality stocks for long term investments
Strategic Tips to long term success in stock market
1) Have a proper financial plan
Yes. The first step to successful long term investing has nothing to do with stocks. It involves your overall financial health. How can you invest in stocks when you don’t have money to spend for routine expenses?.
Will you invest long term if you need to spend money continuously for medical expenses of loved one?. If you do not have a proper financial plan, you can never make long term investments. You will constantly be in and out of stocks. Before you make investments, check if
- You have an emergency fund (atleast 6 months gross expenses).
- You have Proper and adequate term life insurance.
- You make full use of efficient tax saving options.
- You have adequate Health Insurance for all your family members.
Don’t even think about stocks before you fulfill these. Neglecting these are a sure way to make you in-disciplined. When some emergency occurs , you will be forced to liquidate stocks at existing lower prices. This leads to permanent capital loss.
2) Understand yourself
The next step is to categorize yourself. To succeed long term in stocks, you may have average IQ to succeed but need great emotional control.
Ask yourself these questions
- Am I disciplined enough to make regular investments.
- Am I an emotional decision maker.
- Can I sleep peacefully if I lose big money in stocks.
- Am I looking for quick methods to get rich.
- Will my stock failures spill over to other parts of my life decisions.
These questions will help you to self-analyze if you’re suited for direct equity investments. If you’re emotional decision maker or looking to get rich quick, then you will end up making bad decisions.
Such persons better stay away from direct equity investing. Choose trusted mutual funds and let the professionals handle the investments.
3) Start As Early As Possible
Did you know that Buffet just managed 25.42% CAGR continuously to generate so much wealth. Einstein described “Compounding is the 8th wonder of this world“. Investing in high quality stocks and let the wonderful effects of compounding do the magic.
You need to double your investments each month if you delay investing by 5 years to reach the same final corpus. For eg., if you invest Rs. 5,000 from age 25 years to reach X amount at age Y, then if you start at age 30 years you need to invest nearly Rs.10,000 to reach same X amount at age Y.
Must Read: Investing lessons from Warren Buffets life
4) Minimize your investing expenses
Expenses like brokerage costs, STT, taxes, expense ratios, sales commissions may seems trivial when isolated. Combine them together and you’ll see they add up to huge proportions.
As Graham said “Wall Street makes money on activity. You make your money on inactivity“. The more you trade, more brokerages and commissions you pay. This dilutes your long term performance big time.
Pick good stocks at reasonable prices and stay with them. Use low cost mutual funds, adopt buy and hold strategy to save on brokerage and capital gains tax.
5) Diversify and Optimize your portfolio
A good portfolio decides your investment return on your wealth. Some say 90% of your wealth performance will be decided by how you diversify and optimize your portfolio.
You portfolio must have efficient asset allocation. This can be done by diversifying within asset classes (stocks from different industries, stocks within same industry) and among different asset classes (bonds, gold, cash, stocks).
Read our post: Asset allocation and portfolio optimization
For different asset options check – Best Investment options in India
6) Invest only for long term and stick to it
Investment is nowadays confused with trading and speculation. Gone are the days when holding more than 5 years was considered long term investment. Even people who hold for one year call themselves investors.
If you’re holding less than 3 years call yourself trader or speculator.Investing is an art and it needs lot of patience. Patience with high quality businesses yield rich dividends in the long run.
If you had invested Rs.1,00,000 and held great businesses like Wipro, Asian Paints, HDFC, Infosys, Reliance for last 15-20 years you would have become a millionaire by now.
7) Don’t chase the next hot tip or penny stocks
Another common mistake committed by newbies. When they’re new to the stock market they get attracted to these tips and penny stocks. Later only do they realize they have become honey bees trapped in the wax.
Greed is a powerful emotion which sweeps anybody off its feet. All rationality and common sense is thrown at the window. Your greed defines your decision making which is a sure way to disaster.
Related: Penny stocks investing – Good or Bad Strategy?
8) Buy quality business at reasonable cost per share
All these denote the importance of buying at bargain prices.It is just not enough to buy at bargain prices. These are lot of crappy stocks trading at bargain prices.
You must make sure you buy really great businesses at bargain prices if you want to make good profits.
When you’re buying a share, it means you’re buying part of a business. Crappy businesses always lead to loss making stock investments in long run.
Wall Street Journal article: Long term investing tips.
9) Be Patient – Opportunities are available in plenty
Stock markets existed long before you were born. They will exist long after you are dead. So don’t fret if you lose an opportunity. Another one is on the way.
Investing is like a swing with baseball bat. You just need 2 or 3 hits for a home run. And those great investments will make up for the majority of the returns in lifetime.
Wait patiently for that investment or trading opportunity. As long as greed and fear exist in minds of men, there will always be a chance for you to exploit them. BE PATIENT!
Is gold really great investment? – A historic study of gold returns.
10) Be informed and do periodic review
Long term investing does not mean buying stocks and forgetting. You have to be on the watch and guard your investments. Hold the stock as long the fundamentals do not change.
It would be foolish to sell at the first sign of trouble or two quarters of bad results. Instead analyze if there is change in trend or fundamentals which made you buy that stock. Some include
- Change in management philosophy.
- mis-allocation of capital.
- corporate governance issues.
- failure to improve technology or product/service going obsolete.
Do a review every 4-5 months. If a stock fails any criteria, keep it under watch. When a stock gives a bad signal in two consecutive reviews it is a red signal to sell.
Popular post: Common mistakes to avoid in stock market
If you follow these strategic tips then you can be sure make money in the stock market. This is not a complete list but includes important points to remember.
I also gave some tips for trading success.I will cover that in a future post. So stay tuned for that. Subscribe to our newsletter to receive instant update when we do that.
Did you like our top 10 strategic tips for long term investing success in stock markets?. Let us know your thoughts in comments below.