When it comes to long term investing knowledge, patience and financial planning is the key.
Knowledge – In which stock to invest?
Patience – When to book profits or exit the stock with a loss? 5%, 10%, 20% or more?
Financial Planning – I have 10 lakhs to invest. In this stock how much should I invest?
If the above all three are correct then there is a very high chance that you will make good money from your investments.
However there is more. The above are three basic principals, I dig more into some more important principals of stocks investing.
If you follow these investing principals you will come out as a gainer from stock markets.
Sell losers fast and let the winners ride
Assuming you decided to invest in 10 stocks in next 5 months times. You decided to invest Rs. 1 Lakh in each stock. Then you must plan a stop-loss percentage and profit taking percentage. Ideally stop-loss should be half of profit taking percentage. For example stop-loss can be 5% and profit can be 10%. However out of ten stocks there should be three or four stocks that you should keep for at least 10 years.
Lets take an example of a multibagger stock – Yes Bank.
In 18-Jul-2005 Yes Bank was Rs. 64.10. After 12.2 years on 20-Sep-2017, Yes Bank was 1880.10. This is an Absolute Return of 2833.0733%, Annualized Return of 31.9741%. Look at the below stock chart – do not miss the dividends paid. Do not forget that both dividends paid and profits made after 1 year are TAX FREE. This means the return along with dividends us much more than 2833.0733%.
Assuming a rich investor invested Rs. 10 Lakh in this stock in 2005 and exited in 2017 he would have made Rs. 2,93,30,733/- (Rs. 2 Crore 93 Lakhs 30 Thousand and 733 + Dividends). If we include the dividends the profits are much more than Rs. 3 Crores in 12 years.
Unfortunately I do not think there is a single investor in India who actually achieved this feat. I do not know if Yes Bank does give employee stock options (An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.) If they do then some of its employees may have become extremely rich who may have joined in 2005 and still are serving the company and holding on to the stocks. Owners / Managers of Yes Bank have obviously became very rich.
Do not believe in Tips work on your own
Tips provider without any authenticity are best avoided. You must have received SMS/phone calls like make 5 lakh from 50 thousand in one week or something like that, or contact for free two days free trails etc. Do not respond to these messages or calls. If you have a smart phone you can install truecaller app and block these phone numbers for ever. Then there are friendly tip providers also like your brokers, friends, colleagues, relatives etc. It is better to avoid them too.
If can research about fundamental analysis then its good else BSE has selected top 30 stocks to invest. You can chose 4-5 from the list. Here is where you can find the list of top 30 stocks to invest. If you find it difficult to chose 4-5 from the list there is a simple way to figure out which stock to invest in. It is written in my How To Select Stocks course. This course will make you an informed investor in stocks, mutual funds and all other investments available in India. You will know the difference between good and bad investments. After doing the course you will be able to manage your finances well.
Do not panic with slight move in stocks against your buy rate
This is a major problem with most investors. As soon as they invest money in stock they want the stock to move up. If they see it going down they panic and press the sell button. Even the best stock will go through a rough phase. 10% up or down is very common. Do not panic and sell if you have a long term goal.
P/E Ratio is good factor but no the only factor – give it some importance but not all
PE Ratio is one of the most overlooked by novice investor and sought after and studied by experienced investors of a company’s stock since ages. PE Ratio gives an idea on whether the stock price is undervalued or over valued at a given time. Most of the times when a stock is overvalued it falls and if undervalued it goes up. PE Ratio is just one of the indicators to invest in stocks, there are others as well but PE Ratio is a very important indicator.
PE Ratio gives an indication whether current price is justified to buy the stock or not. You can read more about PE Ratio here.
If you find a good strategy juts stick to it – do not over-experiment.
Nothing more to be said here. After few experiments I stock to my my own strategies written in my course.
Think about what will happen to your account tomorrow or in the years to come not the very next second.
Long term is long term do not make it short term.
Have two accounts – one for long term investing only and other for short term trading or investment.
Keep taxes into account while investing or trading. Long tern (over one year) there is NO TAX – short term less than one year – there is 15% tax on profits.
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Dilip Shaw, Founder
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