There are two basic requirements to become a successful investor. First, you should have a well thought out investment strategy, and second, you should follow the right discipline needed to make your investments work for you. You can always chalk out the right strategy and asset allocation by thinking rationally about your financial goals, analyzing your risk appetite, total monthly savings you need and creating a plan accordingly. If you are unable to do it, you can always ask your financial advisor to do it for you.If investing is so simple, then why do most of the investors lose money in the market despite having the right strategy and sufficient cash flow? The answer lies in your approach.
Investing is 20% strategy and 80% psychology. While most investors pick the right stock, what they fail at is in following the right discipline and approaching the market. If you read successful investors like Warren Buffett, Peter Lynch and John Templeton, you will find that they put a lot of emphasis on following the right discipline of investing while investing in stocks.After reading them thoroughly and putting all their teachings in perspective, I have compiled some important points that if followed religiously, will fix all your investment related problems. What are those? Let us understand them in detail one by one:
If someone gives you 10% of lifetime income:
Imagine if you are offered 10% of a personâ€™s lifetime income for exchange of a lump sum money, How will you decide the right price for owning his lifetime earnings? By looking at his past and current earnings, his previous earnings growth, how much he saves and spends every month and how much debt he has, if any. Based on these parameters you can predict his future growth and how much you will get owning 10% of his lifetime income.
An investor should always ask himself, what will he get (or at least expect to get) out of a stock, if he decides to hold it for the entire lifetime of the business. When you own the shares of a company you own a part of his assets and earnings. Even if you are buying a small part of the business, thinking as if you are buying the entire business will give you a realistic valuation approach to investing. By analyzing the history of companyâ€™s past performance, and making some rational, but conservative estimates about the future earnings, you can reach a fair price that you will be willing to pay for owning the company. Â Â
Focus on the economics of the business:
While past performance tells how how the company has been doing, the future of the business performance of the company depends on the economics of the business. Economics of a business are determined by the expected growth in the future, company’s position in the sector, its durable competitive advantage and how long can the company sustain it. A company with dominant position in the market, combined with good earnings, rising profitability, low expenses, and regular dividend payment over a long period of time available at a low price is definitely a great investment. Companies with good long term economics with strong position in the market are great investment for long term.
An investor should always look at companies that have favourable sectoral economics especially in the long term, and find the best companies with quality earnings, good growth in profitability, that are conservatively financed and have a frugal management and start accumulating the stock on every dip in the price.
Unfollow the herd:
Every time the market nosedives, all the tickers are red, business channels tell you how bad it is and you feel like your portfolio is a sinking ship, and nobody wants to stay invested. That is when successful investors jump in to buy quality companies at a fair price. The best way to get quality stocks at a fair price is by investing when they are available at a discount which usually happens during market panic. Benjamin Graham in his book The Intelligent Investor said â€śIn investing you are not right because people agree with you, you are right because you get the facts rightâ€ť. Successful investors don’t get trapped in herd mentality, they do the opposite of what the herd is doing. Every Time the market panics, focus on the underlying business value of the company, if that remains largely unaffected but the price has corrected significantly, you know you are looking at a bargain that will give you multifold return in the future.
When you sow a seed, you donâ€™t expect it to grow and become a tree overnight and start bearing fruits. In order to get some returns from it, you have to be patient and keep working on it. Investing is similar to planting seeds. When businesses do good, stocks eventually follow, but to make meaningful returns from your investment, you have to be patient and give the business time to grow. Time is a great friend of a good company, enemy of a mediocre. When you invest in a great business, the power of compounding works in your favour, giving you multifold returns in the long term. Longer you hold a great stock better will be your return on investments.
Learn from your mistakes:
No matter how careful you are with your stock picking, chances are that a part of your investments will go the wrong way, eating your portfolio profits. This does not mean that you should get disheartened and start blaming the market. A successful investor is always willing to learn from his mistakes and improves fine tunes his investment strategy. Learning is a continuous process, it helps you become better at investing and gain experience. Be mistake friendly, you will have less regrets and more experience (and of course a lot of money in your bank account ). Â
Investing is not a one time gig or a hack. It’s about practicing, making mistakes and learning from them.Investing demands discipline, patience and learning to make a successful passive income. You cannot throw seeds in a field and expect a good harvest, you have to water it, nourish it with manure and protect it from insects to get good results. Similarly, just throwing money in stocks will not give you exceptional returns, you have to be vigilant, look for quality in a business, be vigilant and protect it from potential losses. But as all the hard work in life finally pays off, investing too will pay off in the form of secure and worry free financial life. Â