When you bump into any successful investor in India or abroad, your natural tendency is to go up to them and ask for some sagely advise. While Selfies with a star investor look pretty attractive to share on Facebook or Instagram, there is a bigger truth that you need to understand. For those who love to take autographs from fund managers, ask them how many useful and actionable tips they ever got? The answer would typically be nothing. Let us look at how to win the stock market game. But before that let us understand the stock market investment secrets that most successful investors will not tell you.
1. There is a much larger element of luck than you can imagine
You may gradually come to belief that stock market investing success is all about skill. That is not true. It is a lot about luck and the best of investors have also been extremely lucky. Most investors will be loath to admit this but in many cases they have been lucky to be at the tipping point of trends. Of course, investing is still 90% about skills and only 10% about luck, but you really cannot be a successful investor without that 10%.
2. Get rid of the weeds and water the flowers
That is a poetic way of putting it. What it means is that you must get rid of your losing positions rapidly and hold on to your winning positions long enough. That is the key to successful investing. It is not that successful investors get all their trades right. Their success ratio may be as good or as bad as yours. But, they make it a point to get rid of the weeds and water their flowers.
3. You could make money more often with passive approach
Like it or not; but over a longer period of time, you will make more money just investing in an index fund. There will be odd years when your skills will matter and multi-baggers will come your way. But, in most years, you will be better off in an index fund.
4. Nobody became a millionaire by consulting others
Stop asking for tips and that is something no successful investor will ever tell you. Nobody became a Warren Buffet or George Soros by going around asking for trading ideas and investment lessons. Gain your own lessons and glean your own wisdom. That is the only way to do it.
5. One bad decision can make a mess of your performance
This is important when you are still a small investor. But we have seen the biggest investors losing most of their gains in a handful of trades. Don’t underestimate the ability of the market to snatch your gains, irrespective of how big it is.
6. Most hot stocks are overpriced because the market is smarter
Nothing comes cheap and especially not good and high quality stocks. If everyone in the street knows about a story, you can be dead sure that it is overpriced. The key to smart investing lies in taking on that big risk on the leaders of tomorrow. A plain vanilla approach of following the crowd will not get you too far.
7. Doing nothing is also an important investment decision
A lot of us grow up to believe that successful investing is all about action. That is hardly the case. Good investors have the patience to wait for years when nothing is happening. They also have the discipline to wait on the sidelines when the entire market is falling over one another to buy or sell stocks. Most successful investors will not talk about this as it sounds too prosaic. But, this is equally important. This is not inaction but it is deliberate passivity.
8. Thrift wins: Approach stocks like a basement bargain and pinch pennies
Treat your approach to stocks exactly like you will approach a basement bargain. Get the best possible price, even if it is a good stock. Pinch pennies on brokerage costs and reduce your opportunity cost to the bare minimum. Becoming an absolute penny pincher does a world of good to your investment success.
9. Smartest of investors look for quality businesses and diversify risk
Smart investors don’t buy stocks, they buy the underlying businesses. That is a lot more complex than it appears because there are just too many dynamics involved. More importantly, remember that everyone from Buffett to Soros to Lynch does diversify their risk. A concentrated approach is not very smart in the real world.
10. You have to reject a hundred stocks before you select one
Stock picking is a lot more laborious and boring than you would care to imagine. It is estimated that an average investor has to reject at least 100 stocks before zeroing in on that one stock could be a multi-bagger.