Discipline = My Rule Book (Make your own Rule Book)

Hi Guys!! ..in the last couple of posts, we discussed the reasons as to why anybody should invest in the stock market and also tried debunking many myths associated with it such as it is like gambling, it is not for people with honest income, it needs a lot of money for investment, it is not safe and mutual funds are better option to invest in equity markets. I sincerely hope that our discussions here would have brought clarity and now you are more convinced to confidently walk the path of wealth creation through stock market investing.

There can never be one solution that fits all. Therefore, before you commence your journey, know your destination. It will certainly help if you plan it well. Therefore, please grab a pen and paper and write few questions for yourselves before proceeding further. Truthfully answer the following questions to yourself as these would help you to define your path.

1. Do you have a regular income/savings?

2. How much can you save/ spare in a month?

3. What are your current/ Planned liabilities?

4. When, will you need this invested money?

5. Are you scared to invest your money fearing you may incur losses? Would you rather prefer a trusted professional or an institution to handle your finances for a fee?

5. Emotional insecurities, which may be attached to the fund being invested?

6. Lastly on a scale of 1 to 10, your Greed to the Fear ratio?

** Consider this as a tipping scale and on this, weigh your greed against fear. For example:- if you may have greed pegged at 7, your fear becomes 10–7 = 3 and the ratio would be more than 1. Similarly, if your greed is 4, the ratio would be 4/6, which would be less than 1. With a higher ratio, you should be looking for investment options that are capable of providing more returns and with lower ratios, you should be looking for more conservative and less volatile options such as Blue Chip Stocks, etc. Since this Greed to Fear ratio will be different for different people, their investment approach should also be different.

Take a pause and answer these questions…….if needed, ponder over them overnight or take as much time as needed but be truthful and know yourself. Your answers would be the key to your investment planning. Do not feel proud or sad, if your greed or fear comes as less or more, it is inconsequential, but take pride in answering these as truthfully as possible.

My Rule 1 — The next major planning factor is your age as that indicates your likely financial assets, responsibilities, liabilities, and financial goals. As a thumb rule for beginners, you should invest equal to your age, rounded off to higher five, in more stable investment options such as Large Caps or Blue Chips, and for Small Cap, you may invest 10% for every year of experience in the share market, while the remaining money is to be invested in Mid Caps. At no times the investment in small caps should exceed Mid Caps. For example:- my friend who has just turned 18 but has been investing in stocks for the last 3 years along with his father, should invest 20% of his money in Large Caps, less than 30% in Small Caps, and remaining in Mid Caps. On the other hand, my uncle who is 52 with almost a decade’s experience may invest up to 55% in Large Cap and remaining equally in Small and Mid Cap, while taking care that his exposure in Small-Cap should be lesser than Mid Caps.

My Rule 2 — Rule 2 is fun……while going to the market, mall, or buying groceries, keep noticing how, many businesses are changing the landscape around you. Some shops or offices must be shutting down making way for new shops and businesses. These observations are subjects for your research for investment ideas. For quick background checks, you can use Google or Youtube but in the end, do your research. I recommend making an Excel Sheet of stocks in which you are interested. This sheet should include Financial Ratios as well as intended buying and selling price along with % gains. You can call it your Watch List and from this list, you can also create a watch list in the trading platforms you are using for easy monitoring.

My Rule 3 — Never be in the hurry to invest or to encash (book) profit. Just because you have some spare money and have an investment idea, you don’t have to jump into it right then. Always wait for the price to correct to your Buying or Selling Zone. Also do remember, if you are too ambitious you may miss the trade altogether, at the same time, if you are too cautious, you would always miss out on profits. Therefore, decide your levels on the chart beforehand and don’t bother how much profits you could have earned.

My Rule 4 — Irrespective of the size of the portfolio, never invest more than 5% in any one stock. Just for musings, open any Mutual Fund portfolio…….you will see 100s of stocks in that. The idea is to spread the eggs in many baskets. Even if one company goes rouge such as Coffee Day Enterprises or Satyam, your total loss will not be more than 1–2% of total invested money (remember, in the previous blog we discussed how financial ratios will forecast Doomsday in advance and you will be able to salvage most of the money from that stock). Also, in my experience, at least one in every five stocks bought does not perform to expectations. Imagine getting stuck with stock……therefore the smarter option is to spread the risk wide.

My Rule 5 — If you want your money to grow, please tend to it carefully. At least once a week, you must carefully follow all the news related to your stocks. Many free or paid sites such as Money Control will provide all the information at your fingertips…..just keep your eyes and ears open and never trust anybody with research but your calculations.

My Rule 6 — Ideally speaking, you should maintain some liquidity in the portfolio to take advantage of the volatility of the market, but for people like me without any regular source of income, it may become a little tricky. Therefore, I would suggest that, if the money you can spare, is lesser than your ‘Wish List’, one share price, invest that in well researched Small Cap. As and when the Wish List share price comes in buying zone and you have sufficient small caps of equivalent worth. Swap them. Avoid being Greedy then, as the promised returns on small caps very easily can become assured losses.

Recently, I learned a very valuable lesson from a pro-investor of keeping emotions out from investment. I guess that is self-explanatory, we all love money unless it is our own company. Therefore, irrespective of a brand name or the products, while investing, we should be guided by only one rule — that is — — will this investment be profitable or not?.

That’s all for now guys…..see you next week. This week’s post was on a special request from a friend who wanted a step guide to investing. Friends, your suggestions for the post are welcome and will always be honored. If you too have a nagging idea…..let it out and we will discuss it here threadbare. Else, I guess it is time to move on to Technical Analysis…….as the market is indecisive with India Vix making a low at 12.05 coupled with lower transaction volumes across segments while Indices remain reasonably stable.

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