What are the golden rules of investing? Here is a list from a site in India, circa February 08, 2006:
Sensex is on fire, notwithstanding Wednesday’s dip. It’s a bull run
like no other witnessed by Indian investors. And investment gurus –
like Marc Faber — say this bull run could last for a decade or more!
So what does the layman do
in times of a roaring bull market? Are there any rules for you and me
to follow while dealing in the stock market? What should you avoid
doing? And, more importantly, what should you do? Here are some golden rules of investing to follow:
1. Don’t be greedy: Invest smartly, with some professional help
and some study on your own.
2. Avoid ‘hot tips’: Stay
away from ‘experts’. Use
your own judgement.
3. Avoid trading/timing the market:
4. Avoid actions based on sentiments: Don’t
be emotionally attached to stocks:
5. Don’t panic if the market drops: Hold onto your
winners and sell your losers.
6. Stay invested, possibly continue to invest more: It
is natural to book profits with the markets at higher levels.
7. Buy stocks if there is a 5-8 per cent drop in the market: In this bull market, a 5-8 per cent drop in prices offers you a good opportunity to buy scrips.
8. Avoid checking the price of stocks or mutual funds after you’ve sold them:
9. Avoid penny stocks:
10. Diversify: We
suggest you diversify a bit, looking at stocks, mutual funds,
commodities and gold. (I disagree with this one in form at least)
11. Don’t commit large amounts of money: Even
if you have a strong risk-bearing capacity, we suggest you do not
commit large sums of money at this stage.
12. Don’t trade for short-term
13. Don’t expect to be a millionaire overnight. Patience pays, so be realistic. 14. Stick to the desired asset allocation: Asset allocation is the
key to successful investing, say experts. Even though equities may
outperform debt substantially, it will not be wise to put all your
investments in equities.
14. Distinguish between stocks for keeps and trading: A variation of "never let a trade become an investment."
Buy with adequate
margin of safety: That’s where attractive purchase prices can help. As
a matter of fact, selling stocks is no different from buying them. Keep
a sufficient margin of safety when buying a stock and don’t rely on
making a good sale ever.
15. Sell when value is realised: If
you feel that your investments are adequately valued, you should exit
regardless of how long you have held them.
16. Keep a watch on relative valuations: The
real cost of a stock is not the price you pay for it, but the
opportunity cost of not putting your money in another one.
17. If you realise a mistake, exit immediately
18. Start investing early.
19. Try to invest in things you know.
20. Try to adopt a long-term perspective with regard to investing.
21. Know your risk: Understand the level and amount of investment you are comfortable with.
22. Play safe, invest in a mutual fund: For
those who are still not sure about their research, use mutual funds.
23. Encash when stock prices dip: Reduce some exposure, lock in some profits.
24. Don’t blindly follow media reports on corporate developments, as they could be misleading.
25. Don’t blindly imitate investment decisions of others who may have profited from their investment decisions.
26. Don’t fall prey to promises of guaranteed returns.
Note that these rules are universal, and apply anywhere in the worlkd, as they are based upon Human Nature and behavior.
The golden rules of investing
rediff Business Desk |
February 08, 2006 | 11:29 IST
With inputs from the Bombay Stock Exchange, the Securities and Exchange Board of India, Business Standard and Equitymaster.com
"AS WE WERE SAYING BEFORE WE WERE SO rudely interrupted by a man dressed in a white smock and wielding a scalpel (thank heavens he left his box-cutter at home), the stock market looks a bit worse for the wear."
So says Barron’s Alan Abelson, usually one of Wall Street’s most visible Bears. Just his luck — or was it the Trading Gods having some fun? — that he managed to be out of service for the most bearish period in 3 years. Traders, being a superstitious lot, will soon be begging Abelson to "let us know the next time you go in for a procedure" – so they can get short.
Regardless, whatever the man dressed in a white smock removed, it wasn’t his arch sense of humor or acid tinged tongue:
"The impact of the massive disturbance was global in every sense: Not only were its terrible tremors felt far beyond the narrow canyon of capitalism in lower Manhattan, but they commanded notice in quarters much loftier than trading floors or commodity pits. We’ve not the slightest doubt, for example, that what prompted the famed cosmologist Stephen Hawking early last week to urge earthlings to create settlements in space was, pure and simple, fear of the effect of crashing markets on the human race."
But the key to Abelson’s return is his clear eyed take on inflation, which comports squarely with our own views:
"FOR OPENERS, OUR HUNCH IS THAT MR. BERNANKE’S concerns about inflation, despite his mucking up the message with all that rubbish about inflationary expectations, have more than a modicum of merit. And our conviction on this score is only strengthened, of course, by the fact that so many pundits pooh-pooh inflation as a problem. Indeed, if anything, we fault the chairman for his evident sympathy with the argument that the fearsome upward spiral in the price of crude, so far, anyway, hasn’t been exerting all that much impact in the economy at large.
Apparently, Mr. Bernanke, like his critics, needs to get out more. Oil is a very sneaky commodity. Our old friend and revered Barron’s contributor, Abe Briloff, likes to describe certain stealth accounting practices as comparable to a bikini: what they reveal is interesting, what they conceal is vital. Oil is something like that: Its uses are readily manifest, but it plays a far bigger and more critical role in our lives than is easily perceived.