readers

Golden rules for investing in the stock market

Stock markets are mysterious. The more you understand them, the more complicated it becomes. Even though stock markets are one of the fundamental investment channels out there, we have a very little exposure to the concepts of stock market as such. However, we would be better off by just following few rules before investing in the stock market. With careful discipline, you would see that these simple rules and principles would go a long way in creating long term wealth and financial independence. These rules are very easy to understand, and I haven't strayed into the technicals on purpose, to keep it simple. But nevertheless, the rules are spot on to send the message home. Please note that many of these rules have been a personal experience overtime in the stock markets. They are market tested and authentic guidelines 

Rule 1 :  Have a long vision 

The first and foremost rule in stock markets is to have a very long term vision. I would say, we should get into stock markets at least with a long term plan of about 20 years. This long term vision helps us in making use of the compounding principles and helps us achieve our goals without fail. This kind of long term planning for 20 years can be really boring. And perhaps you would not be see any real gains for the first few years. But patience is the key. We really need to be disciplined and have a long term vision to understand the beauty of stock markets and compounding. 

Rule 2 : Delegate to an expert

If you are young or a newbie, and concerned about the way markets work and pessimistic of the risks and market falls, then I would suggest you to start off with a good financial planner. A financial planner can look into your financial health, income sources and savings percentage and recommend a good mutual fund to start with. Overtime, once you get an understanding of the stock market, you could start playing directly with the stocks of your choice. 

Rule 3 : Choose good stocks that can last long

Always and always, choose good pedigree stocks which have very good business outlook that can last for a long long time. Before you choose a stock, think how likely that stock is going to last for say next 15 years? If you don't see a good future for the stock but has some short term spikes and performance, its safe to ignore investing in such stocks. Don't think about short term stock performance when investing in stocks, you would miss the long term compounding beauty. So choose stocks, which can continue the business for the next couple of decades and more importantly keep growing. 

Rule 4 : Avoid junk and manipulated stocks

If you care for your financial independence, please avoid junk stocks by all means. You would be tempted to invest in stocks showing a 30-40% growth in a couple of days. Never ever invest in stocks for such quick gains. The risks associated with such short term investments can be disastrous and can cripple you in the investment journey. Many stocks on the stock markets are manipulated by operators which show unreasonable spikes or falls. Do not buy into these. Stay away and keep clean

Rule 5 : Avoid turn around stories which have no growth

There can be many debt ridden companies that you may want to invest in, because the once well named companies have turned into penny stocks now. Be aware, the stocks have become penny stocks for a reason. There could be corporate governance issues, there could be issues with the cash flows, liabilities, huge debt piled up etc. Do not ever buy into these stories. Most of the times, these debt ridden companies slowly fade away and you are most likely to loose all capital along with any expectations. This will dent your financial portfolio and cause mental sickness. So again, please avoid fallen stocks. They have fallen for a reason. Instead , invest your time and money in good growth stories

Rule 6 : Invest in debt free companies

Good companies usually maintain zero debt. So its always good to verify the financials of the company you want to invest in, and make sure their debt is zero or negligible compared to the market cap. If you see any stress in their accounts which seems unmanageable, please avoid such stocks. Sometimes, you can ignore the company debts if other financial parameters are good and growth drivers are in place. If the management is good and able, they use usually manage the debt in coming quarters or annual earnings and sort things easily. But make sure the debt is at least manageable and within the permissible limits for us to stay convinced and happy about the stock investment. 

Rule 7 : Invest in good management companies with clear vision

Very important to understand the management before investing in the companies stock. Good companies almost always have a clean and committed management. The management has to be very transparent and responsible towards the share holders. If the management delays the results, or ambiguous in decisions and statements, then such companies are a big no no. Always trust in managements which are amply clear on the company financials, current strategy and future vision with clearly defined goals. Management which walk the talk the are best companies to buy into. Stock prices will eventually catch up to companies with good management. 

Rule 8 : Invest in dividend paying companies

A clear indication of a good company's commitment towards the shareholders is by providing consistent dividends to the share holders.  So always look out for companies which consistency rewards the share holders by providing good dividends. Irrespective of the stock movements, dividends are a sure way for generating passive incomes in the stock market. If you consistently keep investing in good dividend paying companies, you will eventually start generating alternative sources of income by the way of dividends. If you stay in the stock market for long, be rest assured that your dividend income will take care of you annual expenses and more. Also, investing in good dividend paying companies is a smart choice, as companies with good management and generating positive cash flows always tend to give good dividends to its shareholders. 

Rule 9 : Check for good promotor holdings

Always invest in companies which have good promotors holdings. A company's interest in success is almost always as good as the promotors interest. A good promotor with a good zeal for growth and success will drive the company in the right direction. However, a promotor would be committed to the company only if the promotor holdings are good and the company's success would eventually benefit the promotor as well. In turn, a good growth for the company and the promotor would mean a great return for all the shareholders as well. 

Rule 10 : Invest in companies with good earnings visibility

Always invest in companies which have a good earnings visibility. Pick companies where the products are in demand, and with growing popularity. A product with good growth implies good sales turnover which implies good profits. So always pick companies which has a good visibility in the earnings of its product or services. Also, make sure the earnings are consistent and not dependent on any short term market triggers or seasons. 

Rule 11 : Transparent business, good client base

Always invest in companies with transparent business models. Its always good to invest when you understand the business and can relate to its functions. If the business is complicated or too hard to understand, then even if the business outlook is good, stay away. If you do not understand the business, you tend to overlook deciding factors to buy into the company and may hinder your judgement. Always invest in companies with a easy to understand simple business, with a good client base. 

Rule 12 : Valuations

Always try to buy great companies in short term dips. Wait for market corrections to buy into great stocks and hold them forever. Do not try to time the market, but rather be more focused on picking great stocks at reasonable valuations. Short term price movements will not matter when your investing horizon is over a decade. So, even if you don't get a stock for a reasonable price, but you still believe in the future prospects of the company and value drivers, by all means purchase the stocks and don't bother about the valuations much. Be happy that you own a great company. Good company stocks tend to be quoting at a premium, because of what they are. 

Rule 13 : Size does not matter

When you invest in a company, the size of the company does not matter. You can invest in a small cap, mid cap or a large cap stock with the same reasons. As long as we have positive growth drivers for a stock, the market cap of the stock does not matter. But usually, if we spot a great small cap company which is performing exceptionally well and has the potential to become the next mid cap or a large cap, it would provide us with a great opportunity to compound our wealth. But for a naive investor, these opportunities will be very far and very few. Instead, focusing on good growth driven business gives peace of mind and a sure shot success. 

Rule 14 : Keep it simple and small

Investing in stocks can get very complicated, if you don't care for it. But as a principle, stock market investing needs to be very simple. It does not have to be complicated. I have learnt it the hard way. You can just pick a few select stocks (say under 10 stocks) which have good business opportunities and consistently keep investing in them. Over time, you realise the power of simplicity. If you are disciplined and keep investing in good businesses over time, then you see good dividend inflow, good capital appreciation and long term wealth generation from good quality stocks. You may see a good amount of wealth is generated after, say, 10 years if investing. Thats a power of compounding. Compounding is a 8th  wonder of the world, I will leave it to you to experience and realise. 

Rule 15 : Love your businesses and grow with them. Stay happy and free

At the end of the day, don't get too occupied in the stock market. If you have a profession, try to get better at it. Be disciplined in the stock market and keep investing in it every month. And let the market do the rest of the wonder for you. Just invest in great businesses, and learn to grow with them. Attend company meetings, con calls, web meets etc to understand how the businesses are growing. Take pride in owning some of these great businesses. At the end of the day pick moments in your life which matter. And be rest assured, that the stock market will absolutely take care of your financials and future. 

ps - please do share if you like the content


No comments: