The secret for success in stock markets, is actually not a secret at all. In the words of a famous Hollywood blockbuster – Rocky – “you have got to think, like you think”! All that he means is that you devise your own distinctive plan to achieve success. What may work for you may not work for others, but it is unique and suitable for you.
The key for investment success is to identify financially sound companies with competitive advantages and then buying their stocks at a value that gives you a chance for earning profits. The secrets to investing success are divided into two:
- Identify a distinguished organization
- Buying at a bargain price
A lot of investors focus on the activities of High Frequency Traders (HFTs) who buy stocks in large quantities on a daily basis. They believe that they can do the same and become millionaires overnight. However, these investors do not realize that HFTs have learnt this skill after trading day in and day out for over 7-8 years. Novice investors are unwilling to do the fundamental research that’s necessary to identify an industry and a company.
In the words of the legendary Warren Buffet, one must invest in a company as though they could shut the markets tomorrow and not open for the next 10 years. If one is able to identify a good company, they can easily get a 1000% Return on Investment over 10 years.
Everybody wants an edge when investing in stocks. The key here is not to find just a business with good sales, but to find a business that’s got a competitive advantage when compared with its competitors. This advantage could be a superior product, an advanced R&D facility or just the availability of raw materials.
How does one decide a bargain price? This is a subjective topic for every investor. There are some investors who are willing to pay a higher price for a company that shows promise as compared to a company that is already performing well. This is directly related to the risk you are willing to take and the research that you have done. Only with your research will you know if a company genuinely deserves the kind of price the market is asking.
A suggestion: never buy a “great stock.” Every investor wants to own great stocks. Obviously they do and so do you, however, the “great stocks” are normally the ones that are suggested by your friends as “tips”. These stocks fall into two categories:
- Christmas Tree Ornaments – Shiny from outside, but hollow from inside. Easily breaks up with a light touch. They catch the attention of investors easily but fail as the company does not have a sound business. In a few months, nobody even remembers their name.
- Great, but late – Sometimes, a stock shows promise and is yet to be discovered by investors. However, if you over analyze, other investors on the market discover it and due to an increased demand, the stock becomes too expensive for you (unreasonably high).
When you are investing your hard-earned money, it makes sense to get comfortable with your decisions. In the event that a stock doesn’t feel right, don’t invest in it. There are numerous chances, so you don’t need to jump directly to any stock without analyzing it. Finally, it is the investor’s emotions which are his worst enemy. Too much of greed or fear have led many good investors down a path of loss.
BSE Institute Limited offers a short Course on Capital Markets which provides all participants a comprehensive understanding of the Indian Capital Markets. It is ideal for those who wish to begin investing and growing their portfolios. The program builds a solid foundation for every investor to grow on.