To begin with, investors are those who take a long-term view on equity markets. They identify a good stock and more importantly stay with it till the entire story unfolds and manifests itself. So is there anything like Successful Investment Strategies or is there a Bible that tells us How to become a successful investor in share market? Frankly, there is neither! What you have are rules and some pearls of wisdom that can help you become a successful investor. As we said, successful investing involves 3 key steps viz. identifying a Good Story, Staying with the good stories for a long time and exiting losers quickly. It is only when you can master these 3 steps that you can actually become a successful investor. Here we capture the 7 Habits of highly successful investors..
1. Making a binding commitment to your long term investment strategy..
One of the basic things you need to do to be a successful investor is to have a long term strategy. Successful investment strategies are all about themes that hold you in the long run. As an investor you goal is to primarily combine the best of growth and value. Growth companies are the ones that will give you the virtuous cycle of positive price movement, P/E re-rating and profit growth to match up with these valuation re-ratings. A solid investment strategy is based on 2 key approaches. Firstly, you adopt a value approach and try to buy into future leaders at low valuations. Eicher in 2009 or Escorts in 2012 were all examples of stocks that were quoting at deep value. Once the company starts performing, the valuations start going up and that is when you need to treat it is a growth stock. Most important thing is not to waver in this investment approach.
2. Diversify your risk; there is no great merit in concentration..
There is a slight dichotomy here. Successful investors may tell you that most of their money was made in just a few stocks. That is absolutely true! But to survive long enough in the markets to make money you need to ensure that your risk is diligently managed. That is where diversification comes in. Too much concentration can destroy your equity portfolio and hence your risk needs to be constantly monitored. Irrespective of whether you are a trader or an investor, one of your key goals is to preserve capital and that can only be done by diversifying your risk.
3. Never try to overtrade in the market and keep an eye on costs..
These are 2 different issues but have important implications. Your journey of how to become a successful investor begins with managing your costs. Costs have a variety of implications. There are transaction costs, there are regulatory costs, there is cost of missed opportunities and there is the taxation cost. Successful investment strategies are all about keeping your costs to the bare minimum. In the long haul, it makes a big difference to your portfolio.
4. Do in-depth research before investing in a stock..
One of the most critical out of the 7 habits of highly successful investors is the ability to identify good stocks. It is not just about entering into a stock but also about timing your entry. Over the last 10 years, if you had bought into any of the downturns, your returns would have been substantially superior. Before you invest, understand the company, its business model, its core competition, and threats of disruption, check if the company has a moat and a margin of safety, focus on intangible assets etc. Successful investment strategies are all about identifying the right stock and entering at the right time. Focus on how best you can do it and don’t worry about catching the bottom and top of any stock.
5. Cut your losses as soon as possible..
How to become a successful investor in stock markets is all about cutting out your losing positions. A good investor never averages positions in the hope that the stock will bounce back. It is all about conviction. The best of investors can only get 70% of their calls right. For the remaining 30% duds in your portfolio, you need to ensure that it does not unnecessarily eat up your resources and your time creating opportunity losses in the process.
6. Run your profits as long as you can..
Of the 7 habits of highly successful investors, this is what separates the winners from the ultra-winners. Had you bought Eicher in 2009 at Rs.200 and sold it at Rs.1000 after 3 years you would have still made a lot of money. But then you would have lost out on the humongous appreciation that you would have got had you held on. Focus on your conviction and don’t be driven by the percentage returns that you have earned. An investment in Wipro worth Rs.10,000 in 1980 became almost Rs.300 crore by 1999. Therefore, how to become a successful investor in share markets is all about that indefatigable conviction and the patience to let profits run as long as possible.
7. As an investor your focus should be on risk-premiums..
Successful investment strategies are all about buying into risk premiums. You cannot become a successful investor without taking on risk. Great trades in the world like Tudor Jones buying on Black Friday in 1987 or John Paulson shorting sub-prime in 2006-07 are all trades about risk-premiums. As an investor you get many opportunities to make decent money and a handful of opportunities to make big money. It is these big opportunities that will really position you as a successful investor and it is all about focusing on the risk premium. That means the returns are likely to be infinitely larger than the risk that you are taking on.
The 7 habits of highly successful equity investors is essentially a compilation of what differentiates the successful investor from an ultra-successful investor. For you, it could be a starting point.