Rules and tips for the successful long term investor…

The difference between an investor and a trader is a lot more intuitive. But the most basic difference is that an investor tends to have a longer-term perspective. You will be surprised to find that the proportion of successful investors is extremely small. While there is no sure-shot formula to be a successful investor, there are some basic rules that can help you navigate the task of being an investor much more fruitfully. Here are 12 such rules and tips that can help be a successful investor in the long run

12 Rules to help you be a successful investor

  1. Take a long-term view on equities. That is the cardinal rule. You cannot hope to make money even in quality equities in less than 2-3 years. Normally, a holding period of 4-5 year is what you need to be prepared for. Of course, if you are lucky, then returns may come in much faster. The bottom-line is that you need to give time for the equity story to actually play out. Conversion of a good idea into good returns surely takes time.
  2. Always invest with a Plan-B in place. This is slightly more complex to understand. A Plan-B is essential because you always invest in a stock with certain assumptions in mind. You must have a Plan-B which clearly states as to what you will do when the assumptions you made turn out to be incorrect. Whether you are eventually right or wrong is immaterial. It is more important to have the back-up plan in place.
  3. Do your homework on the stock. There is really no alternative to solid research. Understand the business the company operates in and its prospects. Know the entry barriers and understand the competition. You need to ensure that the financials of the company are about bottom-line and not just about the top-line.
  4. It is OK to be wrong but it is bad to stay wrong. It is normal for many investors to hold on to stocks where price movements go against you. That is not a very wise thing to do because idle money has a cost. Most investors, even the best among them, get a good number of their investment ideas wrong. The idea is not to fall in love with a stock.
  5. Averaging your positions is something best avoided. If you bought a stock and the price went down by 10%, the normal tendency is to buy more of the same stock to reduce the average cost. From the perspective of prudent investing this is wrong. Firstly, you were wrong the first time and by averaging you are being doubly wrong. Secondly, you are increasing your exposure to one stock inordinately.
  6. Hold your profits long enough! Imagine that you had bought into Eicher Motors at a price of Rs.200 in 2009. If you had exited at Rs.400 in 2010 you would have still made 100% returns. But that would have been a hugely missed opportunity as the stock is now up by nearly 150 times. Use trailing stop losses or option hedging but try and hold your winning positions for as long as you can.
  7. Take a risk on future winners. If you looking at creating great returns over the next 5 years, you possibly cannot be too successful by investing in stocks like TCS or HDFC Bank. If you look at the outperformers in the last 10 years, they were mid-cap stocks that transformed into large cap stocks. Motherson Sumi, Vakrangee, Britannia, Lupin are all examples of mid-caps becoming large cap stocks.
  8. Don’t concentrate your portfolio on a handful of stories. You may rightly believe that auto industry could outperform in the next 5 years. But allocating 80% of your portfolio to auto defeats the basic grain of diversification. You need to spread your risk. You must not be caught in a situation where something negative like higher interest rates or Volkswagen fiasco happens and the entire auto sector takes a hit. Manage your risk!
  9. Time your purchases. You are not a trader but even an investor needs to time his purchases. For example, had you bought Wipro at the peak of the boom in 2000, you may still be sitting on notional losses. Even when you are talking about high quality stocks, the timing of your purchase can make a huge difference.
  10. Keep an audit trail of your trades. The best insights into successful investing are available when you look back and introspect on your own trades. An investor has to be extremely willing to learn from his own mistakes and taking remedial action in the future. That is only possible by consistently keeping an audit trail of all your investment decisions.
  11. Monitor your positions very closely. Your job as an investor does not end with buying the stock. You need to monitor the company for quarterly results, news flows, institutional action, promoter statements etc. If large institutions are consistently selling the stock, obviously something is wrong and you need to find that out!
  12. There is no such thing as a free lunch in investing. You have to learn it the hard way and that means you have got to pay the price along the way. So be wary of the million-dollar investing idea or that mantra for investing. Nothing of that kind exists. You have to learn how to invest successfully, the hard way. These rules can at beast help you along the way.

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