There is a famous saying “Fools rush in where angels fear to tread”. What does one learn from this saying? Stock markets certainly need to be approached with caution. Most of the time the voice of reason is drowned by the roar of the bull and one jumps in the markets without even knowing what he is doing. Bull markets cause one to do strange things. One must have heard the phrase “Like a bull in a China shop”. What does this phrase mean? Rushing in blindly and destroying everything would be an apt description. This rush of blood to the head causes one to make wrong decisions which would cause him to regret for many years. Act in haste and repent at leisure is the saying apt in such circumstances.
Never forget the basics
Walking in blindfold into a retail store and randomly picking up articles from the shelf. Is this the way one shops? One would be called a fool if he were to do so. But one does this often while investing in the stock market .Picking up shares without checking their fundamentals is a cardinal sin.
- One must always read up the Company he plans to invest in. What is their line of business and what products they sell? Is there a good demand and a market for their product? Do they have the necessary infrastructure and are they able to supply the product to match the demand?
- How long has the Company been in business? Does it have a good track record?
- How do the promoters manage the business? Does it have good Corporate Governance policies?
- Never believe mere speeches of the promoters or get caught in the hype. One must always test the waters before jumping in.
- There is a famous saying “ Never invest in anything which cannot be illustrated with a crayon. One must never invest in a business the dynamics of which he cannot understand.
One might purchase shares of a good blue chip stock and when it rises by a few hundred cash in and make a profit. One might also have shares in one’s portfolio which have been static for a few years or even gone down in value.
- One might have emotions towards certain stocks and might not be willing to sell them even if one is bearing a huge loss on these stocks. These might be stocks related to the industry which one works in.
- One resorts to averaging or increasing one’s holdings in these stocks as the price steadily falls and resolves to hold on to these stocks as long as it takes for them to rise.
- One books a small profit on good fundamentally strong stocks exiting them at a time one should be holding them preferably with a three year time horizon and losing on high gains.
- One holds low performing stocks for long periods of time at a loss due to emotion. One must set a stop loss around 10% where if the stock price falls to this level one’s broker sells these stocks and limits the loss to only 10%.One can then spot rising shares or value stocks and invest in them with these amounts.
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