1) How to invest in stocks? Just like how porcupines mate…”very carefully”.
2) Two rules for stock investing (Warren Buffett) #1 Don’t lose money #2 Don’t forget rule no. 1.
3) Never invest lump sums in equities in one go…you may also lose it in one go.
4) If you are new to stock investing…invest in small lots for the first few years
5) Do not put all your eggs in one basket…diversify between stocks.
6) A ‘balanced-diet’ is not only good for physical health but also for financial health…invest some money directly in stocks, some in mutual funds, some in bonds, some in FDs, some in real estate.
7) Invest in stocks of “good” companies (my past articles offer some insight on this aspect). "It’s only when the tide goes out, you see who’s been swimming naked" – Warren Buffett.
8) Do not invest in companies that carry high level of debt (loans). Zero debt companies are the safest. Some sectors are inherently risky due to high levels of debt – such as real estate, infrastructure and banks. Be extremely careful while investing in these sectors.
9) Invest in companies that have long track record…longer the better.
10) Don’t blindly take advice or “recommendations” from stock-brokers.
11) Don’t invest in stocks for the wrong reasons…e.g. in the height of the bubble for fear of being left out.
12) Don’t expect more than 15% returns p.a on stocks. The lower your expectations, the safer the stocks that you will invest in.
13) People do become overnight millionaires, just that they lose such millions soon enough.
14) Don’t invest in a hurry.
15) Stock investing is for the long term (5 –10 years) by its very nature…desire for quick short term returns can lead to loss of principal.
16) Systematic investing in stocks (directly or through funds) helps ‘beat’ inflation and meet long term goals – such as child’s higher education etc.., but as you near the goal – you need to start withdrawing portions of the money and invest in fixed return instruments to ensure capital protection.
17) If you need money for some event within the next 3 years, it’s better to take that money out of the stock market and invest in fixed return instruments.
18) For novice investors, Mutual funds (not NFOs, but funds that have been around for atleast 5 years) or Index funds (e.g. NIFTY BEES) offer a safe alternative.
19) Watch the P/E (price to earnings) ratio of the Index before you invest (> 24 or 25 is danger) (again…more on this in my previous articles)
20) Stocks quoting at extremely high P/E ratios carry similar risk…because you are paying for future earnings which may or may not materialize.
21) Acquire and constantly update the knowledge required to make and monitor investments.
22) If you are investing directly in stocks…do some homework – check out their products, talk to customers, employees to get a better sense of the company.
23) If you don’t understand what the company does…it’s better to stay away from the stock.
24) If you are too lazy, not interested or don’t find the time to monitor your investments - FDs, post office schemes, PPF and other fixed return avenues are better options, although they may not offer much in terms of returns after you subtract the effect of inflation.
25) If you plan to start investing in stocks for the first time, it’s safer to do so after a big crash, because the worst may be behind you.
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