AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 50 : 26.07.2020

A small retail investor/trader who followed live calls of a famous trainer on a popular social media video network lost a substantial chunk of his investment portfolio in just two days after the call went wrong. Things like heserarely make it to media headlines though they happen every now and then. Hence, we take this opportunity to go back to the basics of investing.

 1. Get Educated : Whom should investor blame when his investment strategy does not work?While typical investors push the blame on someone or something, it is mostly his lack of knowledge or understanding of the financial instrument that leads to loss. For example, investors try trading in derivative instruments to get big money with small capital ignoring the fact that derivatives are largely hedging instruments but carry a risk of total capital wipe-out if they are not handled correctly. Investors should ask themselves as to how much time they are spending reading or learning about the markets. Modern stock markets are dynamic. The rules of the game keep changing quickly.

2. Avoid Get-Rich-Quick mentality : First-timers often feel a stock market is a magic machine that can change quickly convert capital to huge returns in a short time. Common sense tells us that if the market can make you rich quickly, it can also give a counter effect of destroying your capital at the same pace. First-timers should mentally be prepared that their capital could get stuck in the market for several years before compounding kicks in and give decent returns.

3. Goals and Risk : Most investors do not have a specific goal. Even if they have, they tend to ignore or forget it quickly. Goals and time to reach the goal are essential because it can be linked to the quantum of risk that the investor can take. This will, in turn, help in deciding the asset class that the investor has to take and the type of products within the asset class. So, investors should keep in mind their own risk appetite as well as the risk-return potential of the instrument they pick. For example,investors could use Index funds and ETFs first, then move to actively-managed mutual funds before testing equity shares directly.

4. Understand costs involved : Investing activity requires   paying several forms of fees to intermediaries (such as brokers, distributors, etc.) Brokerage costs are influential to investor returns and the latest trend is moving towards discount brokers. Similarly, taxes are applicable depending on the size of the investment and the profits that are made. Media and product literature often exclude these numbers because they are mostly individual-specific.

5. Diversify :Risk can be managed by diversifying. This diversification can be across asset classes,across financial instruments, across sectors and industries, across investment styles. While diversification is good, over-diversification can hamper the returns, and hence the right balance should be obtained after thorough study. Avoid conce tration risk by maintaining proper weightage and balance.A straightforward thumb rule is to invest in one stock per sector/sub-sector (to the extent possible).

6. Blind belief :Believing anyone blindly, including me (the author) is not a good idea, particularly when it comes to investing. Investing is mostly a personalized activity. There cannot be a one-size-fits all system. Who can understand an investor better than the investor himself? Hear and listen to everyone,but evaluate and critically analyze before implementing them. Use all tools and resources available for the task but take the final decision after a thorough evaluation. Similarly, not all literature from the US fits to the Indian context. For example, getting alpha and beta is possible for Midcap and Smallcap actively managed mutual funds in India. This is very difficult in an already very mature market such as the US. Hence, investment literature readers should maintain discretion and test the applicability of the strategies in the Indian context.

 7. Penny stocks can pinch : A stock whose current market price is low is called a penny stock.Some books cite stocks whose current market price less than Rs. 10 (others say Rs. 20) are typically called penny stocks. Investors easily get attracted to penny stocks because their price moment, even though a small one in absolute numbers, will appear big on percentages. This superficial feeling attracts novice investors to put big money anticipating significant returns. However, the direction of price moment of penny stocks is influenced mainly by market operators more than the stock fundamentals.Investors in general, and novice investors, in particular, should stay away from penny stocks.

 

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