1. Avoid the herd mentality
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!"
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!"
2. Take informed decision
Proper
research should always be undertaken before investing in stocks. But
that is rarely done. Investors generally go by the name of a company or
the industry they belong to. This is, however, not the right way of
putting one's money into the stock market.
3. Invest in business you understand
Never
invest in a stock. Invest in a business instead. And invest in a
business you understand. In other words, before investing in a company,
you should know what business the company is in.
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4. Don't try to time the market
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.
"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
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.
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
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.
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.
7. Create a broad portfolio
Diversification
of portfolio across asset classes and instruments is the key factor to
earn optimum returns on investments with minimum risk. Level of
diversification depends on each investor's risk taking capacity.
8. Have realistic expectations
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.
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.
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