If traders operate at the short end of the market, it is investors who operate in the longer end of the market. They typically buy under priced and undervalued stocks and are willing to wait for years for the story to play out. The broad rule of equities is that if you buy quality stocks and hold for the long term then you are more likely than not to make money. Then why is it so difficult to make money as an investor in the markets. The reason is that investment is also based on some pre-set rules and these rules have to be gradually imbibed as habits. Here are seven such habits that will distinguish a successful investor in the equity markets..
1. Play for the long run and stick to your long term plan
Every investor must operate to a plan. You cannot buy a futuristic idea at a bargain price and expect it to give super normal returns within a year. In India, companies like Infosys, Bharti, Hero Honda, HDFC Bank have all consolidated for a long time before generating super normal profits for investors. That is where a clear long term plan comes in picture. As an investor you cannot be too myopic. As Warren Buffet says, "As an investor, your holding period has to be forever".
2. Use diversification to manage risk
Irrespective of what marquee investors may say about the merits of a concentrated portfolio, every good investor diversifies risk. You can be a successful investor unless you diversify your risk. If you put all eggs in one basket you are behaving like a gambler and betting all your money on a stock whose performance you do not have control over. Risk is in your control and the successful investor is always the one who earns the maximum risk-adjusted returns over a longer period of time.
3. Focus on costs, fees and flawless execution
Many investors tend to believe that when you are investing for the long term, costs and execution do not matter a great deal. That is far from the truth. As a savvy investor you must try to make the pennies work for you and the pound will take care of itself. Try to get the best execution at the lowest possible price. In a competitive market that is entirely possible. Think twice before committing money into a hedge fund where the fees are prohibitive and the returns have not been commensurate. Focus on execution. How you churn, how you slice your order and how you manage statutory costs will go a long way in determining your long term investment returns.
4. Focus on post-tax returns
Taxes are not just for the taxman to worry about. As a savvy investor, you must always focus on post-tax returns. If you are making a profit of 40% and sell it before 1 year, then your post tax-return will be just 34%. If you are holding it for a period of more than 1 year you end up paying zero tax. Long term investors must focus on tax efficiency as taxes can wipe away a big chunk of your profits. There is also a trade-off between dividends and buybacks as the former is taxable at multiple levels and that will reduce your effective post tax returns. Buybacks are more tax-efficient.
5. Patience and research form a deadly combination
This is the golden rule. Patience is inevitable irrespective of whether you are a short term trader or a long term investor. Big money never comes easy and it never comes in the short run. As a good investor you need to build that into your trading plan. Secondly, you cannot be a good investor unless you research your investments thoroughly. Get down to granular details. Is the company’s sales growth getting constricted? What are the competitive threats that are emerging? Has the company created any effective entry barriers? What can the company do to improve its growth and its ROI? Are there are any disruptive influences in the sector? The list can go on; but these are the kind of probing questions you need to keep constantly asking yourself.
6. Focus more on the business than on the stock
As Peter Lynch rightly said, "Behind every stock there is a business. First, try to understand the business". You cannot become good investors by focusing purely on supports, resistances, short term trends and reversals. They can yield trading profits but they cannot create the big investment story for you. This field is becoming increasingly complex as product life cycles are getting shorter and markets are getting more competitive. Always keep asking yourself as to what is the USP that the company you own is trying to bring to the table?
7. Always let the head rule over the heart
This is, probably, something that easier to experience than to express. The bottom-line is that a good investor should never be too emotional. Don't fall in love with stocks and don’t get married to your portfolio. Look at your portfolio objectively. Whenever there is a conflict between the head and the heart always let the head rule. When it comes to investments, the best decisions are always taken by cold logic and analysis. When you let your head do the job, you are less likely to take investment and divestment decisions in moments of sentimental weakness. That can make all the difference!
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