Investing in stocks need not be risky. In fact it should never be. ‘Risky’ is that area or path where you have not travelled before or in which you have little or no knowledge. This can be something very obvious. Let’s take example of investing in FD. This sounds ‘very safe’ – isn’t it?
Now, suppose you are not aware of interest rate movement at all. In 2000-01, FD interest rate was hovering at around 10%. You missed that bus and finally invested in 2005-06 when interest rate was at around 6.5%.
Say, your FD got matured in mid of 2010. Interest rate was in the range of 7.5-8.5% then. But in the meantime, in first half of 2009 interest rate raised up to 10-11%. So you missed that bus again.
Again at the first 2 quarters of 2012 interest rate was high. But you had already re-invested your FD maturity amount at 8% for 5 years in 2010.
During this 6-7 years average inflation was above 6%. On top of this if I assume you are in 30% tax bracket, things have turned out worse for you. So, you see, even in FD investment you just cannot afford to go blindfolded. (The above figures are just indicative)
Investing in stocks is no different. You should not approach it casually, blindfolded. You need not have, in fact you should not have hundreds of stock in your portfolio. Pick 5- 10 ‘good’ stocks at ‘good’ price and you are done. You need not follow daily movements of these stocks. Do not get distracted by ‘friendly advises’ or ‘experts’ views’. But finding ‘good’ stocks at ‘good’ price is easier said than done – but not too difficult either. Anyway, you are not aiming to be the most successful investor of this country. All you are aiming is to be an intelligent investor, and trust me – that is not too difficult, in fact far easier than you ever thought of. Of course, we need to follow some investing principles diligently.
If we follow world’s most successful investor Mr. Warren Buffet’s words, these principles are:
- Don’t gamble.
- Buy securities as cheaply as you can. Set up a “Margin of safety.”
- Buy what you know. Remain within your “circle of competence.”
- Do your homework. Try to learn everything important about a company. That will help give you confidence.
- Be a contrarian – when it’s called for.
- Buy wonderful companies, “inevitables.”
- Invest in companies run by people you admire.
- Buy to hold and buy and hold. Don’t be a gunslinger.
- Be businesslike. Don’t let sentiment cloud your judgement.
- Learn from your mistakes.
- Avoid the common mistakes that others make.
- Don’t overdiversify. Use a rifle, not a shotgun.
Follow my blogs. Each of the above laid out principles I will discuss in more details, one by one. So, more on Mr. Buffet and his principles … soon.