The 7 don'ts of investing in a bull stock market
Posted by: Uma Shashikant on Jan 29, 2018, 06.30 AM IST
When the equity markets make front page news, especially the highs of the indices and the millions of gains in market cap, investors begin to take notice. Given the marginal participation of investors in equity markets, this must be good news. Not always. New investors in equity, especially the ones drawn in by the gains that are being made by people around them, run the risk of making costly mistakes. Here is a pedagogical list of reminders about mistakes made over and over again in bull markets.
Do not be
taken in by the new highs. Once the past peak of an index has been crossed, every new level is a new high and there is nothing extraordinary about it. These are journeys of an index which will go up as the market prices of stocks go up. They are not urgent reminders that tell you about lost opportunities. Do not treat them like immediate calls for action. Do not check the index every day, and do not make generalisations based on the index. Explanations about why the market is up or down are equally useless. Discount them. How you will do is a function of what you are buying, holding and selling. Stay focused on that micro reality, not on the macro narratives floating around.
Do not sacrifice
quality for anything. The rising tide allows lightweights to also soar. Do not use the price as an indicator of how good a stock is. What you see as the rise in the price of the stock is in the past and is history. What will matter to you is how the stock will behave in the future. While it is not possible to predict the future with any degree of certainty, you need to have an investment thesis or a basic set of reasons why you bought a stock. Write down those reasons. Make sure your holdings are worth your hard-earned money. Do not take chances with unknown stocks and overhyped IPOs when there are enough of others with established track record and performance numbers to choose from. Your money deserves better.
Do not benchmark
your returns with what you may have gained in the short-term by participating in the equity markets. It is a good feeling to see the value of investments go up. A bull market attracts investors as their confidence moves up when what they have invested in begins to do well, or exceed their expectation. Investors who see a 10% return as fantastic will begin to believe that a 40% return is to be normally expected. Do not be taken in by recent experiences of appreciation in the value of your investments. Learn to see these as the buffer for the inevitable correction that will come in the future. It does not matter when that would happen, not is it necessary to predict the next fall. Returns will eventually average out over time and these abnormal gains will buffer you then.
Do not quit
in great haste. The desire to be right about timing the markets is very high among investors. Coming off from a flat market into a boom creates anxieties. Stories about how someone did not make all the money because of not getting out at the right time remain in memory. Tentativeness about how far the markets will run up will increase as naysayers point to the end of the bull market with every rise. Remember that a bull market is not defined by its highs, but by its lows. No one knows how far your stock will run and you may regret quitting too soon. Allow your gains to run. What you have to be hawk-eyed about is the loss.
Do not hesitate
to throw out the bad apples. There is no way you will get each one of your stock picks right—even if you did the best research and analysis. There are too many unknowns and a stock you picked might end up doing worse than you expected. Your portfolio will do well if you focus on selling off what is losing money for you, rather than selling what is making money. Do not hope to recover your loss from the stock you wrongly picked. You can make it in another stock. By letting your losses to persist, you are allowing your capital to bleed. If you are unable to sell at a loss and move on, you may still not be ready for equity investing. If you do not cut your loss, your profits may get wiped off.
Do not indulge
in day trading if you have not mastered the art of managing your capital. Trading is very different from investing and calls for a different set of skills. Riding the momentum in a stock and booking some quick gains can make you mistakenly believe that it is all easy. It is just that you got lucky in a gamble, and you may not be able to replicate your gains. Traders are tested when the bets move against them and a good one will bow out and take the loss on the chin. The amateur will hold the position and wish for the markets to oblige and get caught up in steep losses. Trading is about moving the capital quickly across positions, evaluating them as you go along. If you merely buy and sell without that agility it is your broker who will make money, not you.
Do not hesitate
to invest in a mutual fund if you are unprepared for direct equity investing. Direct investing is needlessly glamourised. Stock picking and managing equity investments is a serious full time profession and your money can do without your amateur antics. Buying equity funds enables you to participate in the bull market by using the services of managers who will select, monitor and manage stocks for you. The annual fee you pay the fund is so worth the benefits you will receive and it is just fine to focus on your own work and earnings, instead of trying to be an equity investor on the side. It is a smarter choice as several investors who have used mutual funds over long periods of time will be able to testify.
If all the noise about equity markets makes it look like a gamble you like to keep away from, pause to ask if you found out enough before arriving at that conclusion. There are sensible approaches for the discerning investor to participate in the value that businesses create. Participate with the power of information and preparedness.
(The Writer is Chairperson, Centre for Investment Education and Learning)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.
This article appeared in Economic Times dated Jan 29, 2018, 06.30 AM IST