Share market is a risky business. You can hardly make money in it by chance. For success in shares you need to understand how you should play it.
When I started trading in share market, nobody told me anything that I am about to tell you in this post. Had I known these things before I started my career I would have saved a significant amount of time and money. I have now become a mildly successful full time investor and there is one thing that I can tell you with surety that your Intelligence Quotient (IQ) does not matter much in stocks but your Emotional Quotient (EQ) matters a lot.
What does successful stock investing take
Academic brilliance hardly converts into successful stock market investing. All you need to do in stock markets is control your emotions, channelize them in the right direction and you will be highly successful.
Stock Market returns are non-linear
I came to stock markets with a view to making 1,000 rupees every day and was shown the reality by the market in less than a week. I lost half of my capital blindly speculating. I had to go back to find a job to make ends meet after that mishap.
That kind of ignorance puts you months if not years behind in achieving your goal.
Earning regular income from the market is extremely tough. It can definitely not replace your salary or regular income at least in the initial years. You should be very careful if you are thinking in that direction.
To earn a profit daily we get into compulsive trading, which is a sure shot losing game to play in stock markets.
Trading is always opportunistic and I can tell you with experience that there will be no dearth of opportunities for you to bet on. You just need to wait for the one to come your way.
Also, money is made in stock markets in spurts. The biggest money that one will make will be a once in a long while. But that once is a long while return will be good enough to compensate for the periods of non-performance.
Don’t expect the stock market to be your primary source of income
If you don’t have a strong background already and you have recently started thinking of stock markets as a career option, the biggest mistake that you can make is thinking that it will be easy to make a regular income out of it.
There is a high chance that this plan will fail and you will be left high and dry if you don’t give up that thinking. Income from trading can only be earned when you have spent a significant time in the market. You should also have a big capital to make the plan work.
As a young investor with a smaller capital you will be better off if you stick to a day job and develop stock market investing as a source of passive wealth. You will be putting yourself in trouble if you rely on your initial funds to give you an income to survive.
Even if you want to become a full-fledged trader, you cannot expect income from the beginning. You will have to put in the hard work that is required to make meaningful trading income for your survival.
Stock prices do not matter
Often times in my stock market career people have asked me to suggest a low priced stock for them to trade. The naïve understanding is that it is easier to make money in low priced stocks than in the high priced stocks. The basic thinking is that it is easier for a 10 rupees share to go to 100 while it is very difficult for a 1,000 rupees stock to go to 10,000 rupees, which is simply not right.
What does matter is the market capitalization or market value of the company, which is calculated by the below formula
Market Capitalization = Number of shares outstanding x Price per share
Now if a company has 1 lakh shares outstanding and price per share is 100 its market capitalization is Rs. 1 crore, which is 1 Lakh X Rs. 100.
It is quite clear with the formula that any company whose share price is low but has a high number of outstanding shares will still have significant value. A low share price does not necessarily mean that you are trading in a small company.
Another lure for newbie investors is to trade in stocks price below Rs. 10. They are mostly tempted by the fact that how little the price have to move for them to make significant returns. For example, investors can be tempted to invested in a 2 rupees stock thinking that if it goes up to just 4, they will make a 100% return, something that take years for investors to earn. What happens in reality is quite the opposite; a 2 rupees stock has higher chances of going down to Rs. 1 because the stock would have become a penny stock due to a permanent irrevocable damage to the company’s business.
When you are starting afresh you tend to think that it is worthless to think about brokerage when you will be making so much money that a small sum such as brokerage will not impact you. Brokers are always on the lookout for such investors because they know they can charge high commissions to you.
Sample this, A 0.3% of brokerage will take away more than 1% of capital if your turnover is just 4x your capital in a year. This is not considering the GST or any other indirect tax. My turnover was more than 20 times my capital in the first year of trading and I was paying that kind of a brokerage. I had to pay that on the top of my losses, which was really hurtful.
Brokers will always give you a bad deal if your capital base is low or if you are not a regular trader. It will be best to go to a discount brokers as their commissions are the lowest. If you are a self trader and a technical analyst, then these platforms have a lot more to offer. They will charge you if want to call and trade but that would not be required as in the smartphone world it won’t take much of an effort to trade by yourself.
Read and learn from other investors
The best way to kickstart your stock market investing journey is to read what successful investors have done. Read about their strategies and how they go about making money from the market.
I personally read quite a few books before I understood what trading and investing style suits me. The books that really gave me a headstart were The Intelligent Investor by Benjamin Graham, One Up On Wall Street by Peter Lynch, Trade Like a Stock Wizard by Mark Minervini, and How to Make Money in Stocks by William O’Neil.
After reading these books and many others I developed a momentum investing system of my own which has made me a fortune. It took me 3 years to build and test that system. The first time I made a fortune out of it was between 2016-2017. My wealth grew 10 times in this period, thanks to the system I built.
You can entirely mimic other investors’ strategies or make a strategy of your own to make yourself a fortune in stock markets. In both cases the starting point will be knowing about these investors and their strategies.
So grab a few books and read them while you are on it.
Do not blindly follow big successful investors
Learning from these investors is one thing and copying their investment or trading ideas is another thing. Something that can be of interest to Warren Buffet may not make sense to you as you both have different objectives.
Buffet will be happy with a 20% return given his quantum of investment, but you would want to double your capital in lesser time.
Following another investor/trader blindly is called piggybacking and the problem with piggybacking is you would not know when the other investor changes his mind. You would be left alone and uninformed if that happens.
You can adopt their strategies, but the ideas and thought process behind your investment and trades should be of your own. You should know when to enter and when to exit. You should be informed enough to change your mind when it is required.
That will happen only if you are completely independent in your decisions.
Understand the basic pattern of markets
The stock markets tend to follow a pattern. Let’s see what it is.
When the markets see a decline (typically 20-50%) in a short period of time due to excessive pessimism, there comes a good bit of consolidation (Indecisive range-bound movements) which can last for up to 3 years before a new bull market begins which takes everything higher. This brand new bull market can last anywhere from 2-5 years. During this time markets will gather excesses when everything will be crazily priced and prices will reach a level where buyers will get exhausted. This is when the market comes under severe selling pressure and sees a significant decline as mentioned earlier in the paragraph. The cycle then repeats itself again.
While the pattern will almost always be the same, the factors leading to the bull market and the subsequent decline will be different every time.
Let’s understand why understanding the importance of patterns is important
In the above long-term chart of Nifty, the Nifty went through multiple phases of declines and consolidation which were subsequently followed by rallies or bull market. Some of them lasted a lot longer than others.
Steep rises in a short period of time are often followed by deep cuts in a short period of time. The markets have evolved quite a bit from how they used to be. Nowadays bull markets are lasting much longer and bear markets are much shorter.
Markets follow a trend
As evident from the earlier point at any point in time the market can be said to be in an uptrend, in a downtrend or sideways. If your idea is to make big money without too many hiccups, always go with the trend.
I have seen only a few people who make money trading in a sideways market. In the game of short-term trading only 1% of the traders make money and you stand a better chance to be amongst that 1% if you trade with the trend.
A minuscule portion of shares in the entire stock market universe is worth keeping forever
Not all stocks can be held forever. Long-term investors keep their stocks investments intact in all market cycles. Resultantly, these investors also lose quite a bit in the market downturns. No matter how patient you are as an investor it definitely hurts seeing your portfolio value going down.
Now this loss can be temporary or permanent. It is temporary when your money is invested in companies that have businesses that can perform well forever and it is permanent when your money is invested in companies that were overhyped in the last bull market but are now in the dumps.
A retail investor is most of the time invested in the companies that were overhyped in the previous bull run and suffers a great deal of loss when the stock prices of those companies never recover.
I know it from personal experience. A number of stocks that I sold at a loss of 30-50% are now near zero. The companies have gone bankrupt.
The evergreen investable stories in the market are far and few and most of the time retail investors avoid them because they are almost always slow (but steady) risers. Retail investors are are always interested in and betrayed by the get rich quick schemes.
Even then, you can easily avoid the loss if you accurately classify your investments as the ones that can be held forever and the ones that need to be sold after they have appreciated or declined by a predetermined margin. It is pretty easy to do that once you have spent enough time observing markets.
The top is near when too many people start talking about stocks
I got my demat account opened in January 2008 and executed my first stock market trade on 21 January 2008. That was the day when the bear market of 2008-2009 began. My first investment was down more than 20% in a day.
I thought it will come back up like the market always had in the past few years. I was dead wrong. My stocks never came back to my buying price. I had to sell stocks at heavy losses.
That time was euphoric. Almost everybody I knew was talking of stocks. Had I been a little smarter then, I would have been very cautious about investing at those levels in the market.
The retail investor catches the market fever very late in the bull cycle. He gets confident when he makes money for 6-12 months and then he starts taking it for granted. This is when Mr. Market gets angry and goes in the destruction mode. Many investors lose their hard-earned money to never come back.
If you have come to the stock market just because you heard about it from too many people, be alert and tread cautiously. Be wise with your money. Do your research before investing and stay away from overhyped stuff.
Use leverage responsibly
While opening the demat account your broker will highlight how can you trade for 5 times or 40 times your available capital during the day. Most of the novice traders get carried away by this offering.
Is leverage really beneficial for you? Let’s find out
The temptation for using the leverage to magnify profits is real. A 5% jump in a stock where you are 5x leveraged will mean a 25% profit. Who would not want after all? right?
What people do not think about is the downside that it brings. What if the stock you have bought goes down by 5%. If you are leveraged 5x, you lose 25% of your capital in one day.
It happens to almost everybody who dreams of becoming the king of the market with intraday trading. My advice to new traders would be to stay away from leverage as much as possible. You will thank me years down the line if you follow the advice.
Also, highly leveraged derivatives should strictly be avoided by a new investor.
Manage your risk well
Risk management is probably the most overlooked aspect in stock investing. How many times has it happened that you painted a very optimistic picture while taking a decision and the decision actually turned out to be bad. If that was a big life decision, your life goes for a toss.
Investing is similar. If you are very optimistic about an investment and it does not work as you thought it would, your capital may get washed out. If that is borrowed capital, you are further in mess.
In stock market investing it is always important to know how much to bet, how much to diversify and when to let go of a bad investment. Don’t keep all your eggs in one basket and don’t keep too many baskets either. Always maintain the right balance between risk and return.
In trading it is extremely important to follow stop losses.
I know it hurts when you see your stock going down. The downtick brings a lot of financial and mental pain. To avoid the discomfort of seeing a reduced capital we let our losses run. We think it is not a real loss until we book it.
Contrary to that, a loss becomes real the moment stock price goes below your buying price. As humans, it hurts to see ourselves going wrong. Booking a loss proves you were wrong and this what stops traders from taking losses.
As a trader your most important rule should be to take losses whenever your bet goes wrong. It is pretty normal in trading for your bets to go wrong. Going wrong is not any investor’s mistake but staying wrong definitely is.
When you make money in the first few trades, you start admiring yourself. It happens even when that success was solely because the markets were good. You stop listening to best of the advice and take things for granted.
I would say be careful when things are bad and be extra careful when things are good. That is when you make the biggest mistakes, which can cause you a lot of financial and mental pain.
Do you research and manage your risk well in the bull markets, especially when the market has run up for 2-3 years in a row. You may be in for a rude shock if you become overconfident about yourself.
Don’t fall in love with your stock
Often times it happens that you bought a stock after a diligent research when you got convinced about the idea. You got convinced further when someone else also vouched for the idea. Now all is well if the stock does exactly what you expected it to do. Except, it does not happen a lot many times.
Your chosen stock may do nothing or even decline from your buying level. It may never perform the way you expected it to. It can show deep cuts in your capital.
When that happens you should not be emotional about your decision. Adapt to the changed circumstances and get rid of the stock, from your portfolio and your mind.
Marrying a stock idea is very dangerous. It can cost you your money, time and mental energy. You should always be objective about you investments. You should accept the fact that you will not always be right about your stock ideas. You should learn to move on.
Don’t fret about missed opportunities – the next one will be just around the corner
It happened to me often that I researched a stock and did not buy it for some or the other reason just to regret later when the stock went on to become a wealth multiplier.
In my earlier days I would just look at the stock price and regret. I was wasting so much time just mourning about what I missed and how much could I have made had I bought the stock. In the meantime I also stopped focusing on other opportunities.
Of all the mistakes I have in my investing career, this has cost me quite a bit in lost opportunities.
It is okay if you miss opportunities because in stocks you will find opportunities every other day. Just keep looking and do not waste time regretting what you did not do.
Keep your mind open for new ideas
If you are an investor or trader, who is not open for change then may be stock market is not the place for you.
In share markets, you should embrace newness. It is the new ideas that make the most wealth in stocks. The old ideas fade and give way to newer ones. You can’t imagine the kind of money you will make if you find a new story early on and invest in it.
Imagine investing in an Amazon or Google when they were new. Or imagine investing in a Bajaj Finance when it was new. These companies are huge wealth creators of all times and may have multiplied your investments more than 100 times.
All it would have taken was to keep an open mind and get on them early on. Don’t ridicule an idea just because you have never heard of it or don’t put a blind eye on an idea just because it is not coming from an influential source.
As an investor you should always be a good listener and also have an opportunistic attitude. You never know when is the biggest investment opportunity of your life is coming your way.
Shut down the TV and DON’T listen to those experts
I have seen so many new traders get glued to their TV sets on the business news channels to listen to what their experts have to say every hour. You would always be better off if you stay away from the TV and build your own trading or investing strategy.
If you are watching the TV for news, the best thing to do will be switch to readable news formats like newspapers, blogs, journals etc. This way you will develop a reading habit that will go a long way in building a knowledge base and construct a good foundation to become a seasoned investor.
Knowledge works like compound interest. You keep adding the gains and the gains on gains as you accumulate knowledge. As you spend years accumulating knowledge, every incremental decision takes less of your time, you remove the noise from your life and you become a pro in whatever you do.
The lesser you get carried away by the view of people of TV, the better it will be for you.
Learn something new everyday
In continuation to building knowledge, if you make it a point to learn something new every day, you become incrementally wiser every day. There are a lot of benefits to that.
I once learned a trading technique reading an 80-page book. The trading technique I learned helped me make a few lakhs the very next year and has made me much more money in the subsequent years. The book was almost free, I just invested a day’s time to learn the technique and maybe a couple a months time to refine the technique for my use. But it made me a disproportionate return, which I would not have made had I not stumbled upon the book.
I have spent a considerable amount of time reading and even today when I pick up a new company to read I realize there was so much I did not know about even the most popular businesses. There is no saturation to learning in stock markets.
In share markets you learn about business, economics, politics, people, and much more. Make it a point to take some learning from whatever you are doing on a daily basis.
Build your own winning system
This is the most important part of the post
When I started investing, I remained confused for a good amount of time understanding what I should be focusing on. I did not have the patience for value investing and neither the courage for growth investing. I knew quite a bit about stock markets and companies but I had no idea how do I put everything together and make money.
I needed to figure out a working system for myself so that I do not come to work every day being clueless on what should I be doing today. Since then, I have worked pretty hard on building a stock picking and portfolio management system for myself. It took me a couple of years, a lot of reading and a lot of silent observing of the market to build that system.
I now have everything cut out, I have systems that throw new ideas to me day in and day out. I have a system that tells me when to buy and when to sell. Most importantly it tells me when to sell my losers too. A system brings a lot of clarity to your investment process. You will always be in charge and on the top of your game if you go by your winning system.
Your system should be a rewarding system. It should be built considering you psychological limitations as well. It should tell you how would you behave at different times in different situations. It should tell you how would you deal with success as well as failures. It should be a holistic system with all the answers.
Becoming highly successful in stock markets will take a number of years, meticulous planning, and a lot of effort. Even after you have got everything right you have to keep evolving. You should never get complacent. Most importantly, manage your risk so well that you do not regret any day being in stock markets. Keep learning and unlearning. Work on your behavioral biases. Build a winning system and you will never be let down.
I would love to know your thoughts in the comment sections below. Ask whatever is on your mind and I will be happy to get back to you.