Can I be painfully honest with you for a moment?
And I can almost guarantee you will not enjoy it.
You know how you’ve been struggling to get more and more returns on your investments? Tried everything, and it’s just not working, right?
Well, it’s not because you haven’t found the right investing strategy. It’s not because you need to change your investing guru. It’s not because the Mr. Market have turned against you and cursed you to wallow in mislaying forever.
It’s because you’re dumb.
And if you ever want a chance to earn passive income from your investments, you’d better smarten up.
Did I really just call you “dumb?”
Yes, I did. Sorry.
This is not a ruse where DUMB turns out to be a clever acronym for something far less offensive. The truth is, I’m calling you out, and I’m doing it out of love.
Because you see, everyone has been lying to you. Including me.
We teach you investing strategies. We dole out trading tips. We give you a pep talk and make you believe maybe you can really become the next investing superstar.
There’s one really big thing we’ve been leaving out. Here it is:
“Popular investors are smarter than you are”
And no, I’m not talking about IQ. Instead of their simplicity and transparent views.
Investing is not much complex, in lieu you made it complex. Being simple is the way to turn your ass out as a smart investor in the crowd of dumb investors.
How to make yourself smart Investor
I was not what you would call a “bright” kid.
I bunk my school classes. I failed tests. I scored mediocre grades.
But sometime around the age of 16 or so, I got fed up with myself and decided to change things. I just started caring less about what my friends are snapping at Snapchat and started thinking about who I wanted to become.
And that person was smart.
So instead of spending my time on FaceBook, I started scrolling MoneyControl. If my parents endorse me some money, instead of spending it on leisure, I buy books to furnish my finance knowledge. On the weekends, I stopped going to the playground and hunt out at the library, reading books totally of my own interest.
Nobody told me to do it. I just did it. Because that’s who I wanted to be. Within a year, I was well furnished with more than basic knowledge.
Each and every one of us decides who we are. No, you may not be ready to be a popular investor now, but you can become ready.
The whole reason for dictating this trash is not to brag my past or to publicly announcing myself, instead make you understand that you don’t need to be extra-ordinary to get extra-ordinary returns. Doing things simply is what drive great returns.
Finally! Here’s what you’re here for…….
So let me share some simple tactics that I’m using and tested since I started investing (and even a dumb head can use this tactics).
#1) Be Greedy when others are Fearful
This is often quoted by great investor Warren Buffett. So instead of giving you theoretical preaching, let me try to illustrate it.
I bought some shares of ICICI back in May 1st week when it was trailing at low of 214 and currently (14 June) it is quoted at 245 INR.
I just followed a simple tactic – Market devalue share on each and every negative news without considering the fact weather it will hamper its long term value or not. It’s a great time to enter in market. Nerd investors are pessimist, most of the shares are red and people are pulling out their funds in market.
I heard a negative news of ICICI that its net profit plunges 76 per cent to Rs 701.89 cr on NPA surge.
In continuation, again another bad news – ICICI Bank reports lower than expected Q3 net profit, bad loans rise and also ICICI was fall out of top 10 market cap list.
Above statements are enough to clarify its bad situation right now but…
What made me invest in such bad times?
Always remember this when it comes to value investing – “Buy wonderful companies at its low instead of hoping ordinary companies to go up”
Its a common phenomena that a bunch of quarterly news can’t decide the company’s future. In addition, great companies will always find ways to tackle its pitfalls which maintains their futuristic growth and ICICI presence in BSE30 (Sensex) shows its greatness.
In short, news can change company’s price but can’t change its fundamental values. Currently, same situation is happening with pharmaceutical companies. Here comes my next investment…. Cipla disappointing results, profit falter.
Again its a great bet right now. I entered in Cipla stock on 2nd June @468 INR and now just check out it’s current trailing price.
I just want to clear out one point – Market devalues stocks on bunch of negative news and value investors hunts this situations to get most out of less.
Here’s a short overview of situation…
People will hear out news >>> they will react emotionally >>> they will feel insecure (like all are selling stocks, why shouldn’t I?) >>> this results in high sell-off >>> stock price declines >>> smart investor leverage this situation.
Don’t get excited….
However, this technique sounds simple but still their are some precautions to consider before reaching out to final decision.
- Don’t consider buying all stocks on bad news. Some stocks have stinky financials. Have a short overview over their financials.
- Don’t follow this technique in Government owned stocks. Actually government own stocks are owned by Current President of India, not by any individual promoters. So it decrease the chances that it will recover its value in future. For example, MOIL ltd (a government owned mining company) has its maximum number of share under President name.
(If image is blur, follow the link here to get navigated to the source page)
- Have a keen track over stock news, download any news app. I prefer Inshorts, What do you prefer? (see you in comments).
- Set stock alerts in moneycontrol to get notified whenever a stock touches your desire price.
- Another excellent alternative to create a customize notification would be Google Alerts. Steps – Search any stock on google search bar >>> navigate to news section >>> At the end of the page, you can locate a “create alerts” buttons. Create some alerts and keep an eagle eyes on emails.
- Twitter is also evolving as a great source of news for investors. Well explained by theguardian….
A simple search on Google (top 50 financial twitter feeds) will swamp you with more than enough results OR you can find them easily segregated in my profile (whom I’m following). Here’s the link – @sowmay_jain. I usually re-tweet the news that can make market dance.
There are many other sources to quickly get updated with financial news but for now just try above method. If curious enough, shout at comments below. Now lets switch to second strategy.
#2) Stop digging when you find yourself in a hole
Its not about doing any research or sticking your eyeballs on stock charts or dying out to find any news for gaining out of volatility…..
Its all about restraining yourself if you find yourself in any bad investment. Every human make mistakes, even great superstar investors sometime takes wrong steps but what makes them great is they admit their mistake and take back their steps.
A uncle of mine once bought a huge amount of shares of Jaiprakash Associates.
He bought it 3 year back when it was quoted at 100 INR and now its trailing around 8.
Why didn’t he sold out it stocks when he found it going down?
Interviewing him a bit gave me a good conclusion. Here comes a emotional phenomena…. step by step.
- When stock goes down to 75 from 100. The though came in his mind was – “I’ll wait until it again get recovered”
- When stock goes down to 50 from 75. The thought came in his mind was – “I’ll wait until it again get recovered, otherwise my 50% investment will get lost”
- When stock goes down to 25 from 50. The though came in his mind was – “I’ll wait until it again get recovered. I already lost 50%, lets bet other 50 too. May be possible that it may go up”
- Now when stock is trailing around 8. He may be thinking – “What the heck will I get by selling this crap? let me retain them and wait for any miracle”
At every downside of stock, his “emotions of losing money” and “hoping that stock may go high” conquer his decision. Instead of relying on vicious circle of advisers, brokers, pro investors etc, he would have rely on financial data of company.
Its not only his position, it happens with us all, driven my emotions. You can easily locate it out by seeing many trending questions on Quora: Q&A.
- How do I cover my loss of 100000 INR this year in the stock market?
I would also like to share one of my mistake I made on betting stock of Tree House (sometime I also react like a dumb investor)
I bought this stock @76. Now it’s trailing around 48.
My luck! here’s a good news. Guess what? I sold it when it was quoted 58. This decline in price came after Morgan Stanley Asia pull back its fund from Tree House…
You may have thinking – “Is he gonna mad? It’s not something good happened to him instead he lose 18 Rs per share”
Yeah, exactly. You’re right at your place but according to me it’s a good news because I saved myself from losing more 10 Rs per share. I didn’t act like my Uncle acted in case of Jaiprakash Associates.
This behavior is termed as loss aversion, well explained by Robert Hagstorm in his book “The Warren Buffett Way” :-
“The downside of an investment (a loss) has a greater emotional impact than the upside. This fundamental bit of human psychology is known as asymmetric loss aversion. applied to the stock market, this means that investors feels twice as bad about losing money as they feel about picking a winner”
Timothy Sykes, superstart penny stock trader also explained this in his own words – [bctt tweet=”Every single loss that I take encourages me because when you do wrong, now you what to do (via @timothysykes)” username=”sowmay_jain”]
Enough of 2nd strategy, now let us discuss about 3rd one…
#3) Concentrate on Mid & Small Cap stocks
Indian mid- and small-caps remain world’s best equity category: These are words said by Shankar Sharma (Vice-Chairman and Joint Managing Director, First Global) in an Interview.
You can also get a quick overview of his interview on Business-Standard website here.
Also read another aired content in favor of above statement on Economic Times – 62 smallcap stocks doubled investor wealth.
Lets have a look some numerical matrix….
Below are aggregate last 3 year returns of 3 different capitalized markets:
- Large Cap Index – 39.2%
- Mid Cap Index – 77.2%
- Small Cap Index – 82.1%
Now it doesn’t need Einstein mind to Locate out which sector provide great returns. And also well explained by Jimeet Modi, chief executive officer, SAMCO Securities, said,
“More and more retail investors are entering the stock market in the hope of earning quick money. The potential to double money in such small cap stocks are higher compared to the large cap stocks. This is because most of small cap companies tend to grow at the faster rate in an environment of growth in the country. Large cap companies are already well established and therefore are available at fair valuation and have appreciated in tandem with growth number.”
Hey, Hold on! Don’t Day Dream…
As said by French bankers, “Extraordinary returns comes to those who goes extra miles”.
So to get more return you would in Mid or small cap stock but remember a simple phase, More the profit, more will be the risk. Many stocks had also wiped out investors wealth by more than 95%.
Chromatic Industries fell 97% from Rs 124.75 to Rs 4.21, Sudar Industries fell 93% to Rs 11.07 from Rs 159 on January 1. The other top losers were Aanjaneya Lifecare (down 92% from Rs 752 to Rs 60.15), Tuni Textiles (down 91% from Rs 127.40 to Rs 10.34) and Orient Paper and Industries (down 91% from Rs 79.65 to Rs 6.71).
To tackle above problem and to build more profit optimized portfolio, track the following factors (outsourced from businesstoday).
Track record of promoters:
The first thing one must check is for how long the promoters have been in the business and whether they are backed by a strong team. It is better to have face to face interaction with company’s managements but retail investors have no option so they should rely on research reports on this count.
A high promoter stake shows his confidence in the business. You should also ask if the promoter plans to increase his stake. One has to be extremely cautious while investing in smallcap companies. Attributes such as promoter holding, shares pledged, return on equity and debt-to-equity ratio should be considered carefully.
A unique and robust business model augurs well for the company in the long run. If a small company is present in areas dominated by those with deep pockets, then chances are that it will close shop sooner than later.
High debt means the interest outgo is huge, which can be a big drag.
Experts say institutions avoid buying shares of small companies due to lack of liquidity. But if you come across a small company in which institutions have bought stakes, you need to take the stock seriously. But be careful, as institutions can also take wrong calls.
Apart from this, I also prefer to look over some growth matrix such as return of equity (ROEs), return on capital employed (ROCEs) to judge the quality of these businesses. Stocks with reliable business model, strong anticipated sales growth, sustainable operating margins and cash flow generation and attractive ROEs and ROCEs will tend to score better in future.
Note – If you’re not capable enough to value the stocks from above mentioned matrix then stick with Large Cap stocks as they are less risky then small and mid.
It’s better to invest in stocks by your own personal analysis. Don’t rely on others recommendation. Nobody suggest anything until and unless they are benefited. Do some research yourself and invest wisely.
Here’s a small experiment I did to authenticate the truth…
I searched on Google with 2 different terms:
Guess what? The total Google results differed by almost double.
All web is filled out with stock recommendation. Everybody want to get rich by doing what others are doing. Go look at your web right now. Come back here and tell us about what you find. I bet you’ll have something to say!