Stock Investing: 4 Tips for Getting Higher Returns While Investing in Stocks
Investing in stock markets has traditionally, at least for the layman, been the go-to way to earn an extra dollar. This more often than not led to them burning their hands in the process.
Therefore, it is of the utmost importance that people who are curious and serious about stock investing do so with a very systematic and careful approach.
Here I provide some of the most important tips that can enable higher returns while preserving capital.
1. Don’t chase after tips
Nearly 9 out of 10 people I’ve met entered the markets because of advice they received from a “sympathizer” or insider! Logically, why would an “insider” reveal the know-how of a listed company when even our local samosa seller would not want to divulge his recipe? Running after advice without doing your own research can prove fatal to your trading account. Instead, one should thoroughly research the business before investing one’s hard-earned money in it.
2. Fundamental analysis
Speaking of research, not everyone in this world has the temperament and mindset to conduct in-depth technical analysis and invest based on it, but we can all read correctly. The greatest investors on the face of this earth have all been bona fide fundamental investors. From Warren Buffett to Charlie Munger, everyone has built massive wealth simply by thoroughly understanding and researching every aspect of the companies they have invested in.
Regardless of the quantum of the corpus, as an investor it is always better to invest systematically than to go all out. For that, the aforementioned event is what you call a Black Swan event, a rare event that happens once in a lifetime, and expecting it to happen again is just plain stupid! Instead, we should plan our portfolio so that, even in the aforementioned rare event, we are well positioned to benefit by increasing the amount invested in that particular month or year.
Read also: Why invest in international funds and how to do it
3. Diversification is good, no over-diversification
Although investing all your money in one stock or sector may be too much of a risk to take, diversification between the companies you invest in is prudent and bodes well for the long term. However, over-diversification, that is, investing smaller amounts in anything and everything, can be detrimental to the long-term growth of your portfolio. This is why it is better to invest respectable sums in a smaller number of companies rather than small sums in a large number of companies. Doing the latter would inevitably negate the gains you make in one stock with the losses you make in others.
4. Always know how much you can afford to lose
I cannot stress this enough. Before getting into a stock, a lay investor would know when to exit it, for example with a profit of 20-30%, but would not know when to exit it on a downside. Instead, he prefers to invest more in the hope that it will turn around. This is the most common and dangerous mistake to make.
If we simply reverse this scenario and the person investing knows in advance how much they can afford to lose before making an investment, they would have more opportunities to invest, reflect and improve. And not having a maximum exit cap in case of profit, would allow him to take advantage of truly multiple gains and multiply his portfolio.
(By Amandeep Singh Uberoi, CIO and Founder of Grow)