Article

Habits You Need to follow to be a Successful Investor

10 Oct 2019

Most of us open a trading account with a broker with the aim of becoming a successful investor and, perhaps, finding the next Eicher or Infosys. Share trading and investing is not just about knowledge and insights but lot more about specific psychological and mental traits that you need to cultivate. There is no royal route to being a successful investor. Your best bet is to imbibe some key traits of becoming a successful investor and gradually build them into a force of habit.

Your trading account is just your gateway to becoming a successful investor. You can actually become a consistently successful investor when share trading becomes a force of habit built on smart principles. Here are habits that can make a world of difference to your success as an investor.

Habit 1: Take a long term view and stick to your plan

More often than not, patience is at the core of being a successful investor. But to be patient you must have a long term plan. Above all, you must have the consistency and discipline to adhere to this plan. For example, you cannot buy a futuristic idea at a bargain price and expect to earn supernormal profits in a year. Companies like Infosys, Bharti, HDFC Bank and Eicher consolidated for long periods of time before giving a major breakout. Make patience your first habit and don’t keep switching your investment philosophy.

Habit 2: Risk management is mandatory; so spread your risk

Sceptics often argue that Buffett and Lynch made their profits in a handful of stocks. What they forget is that these marquee investors could survive for such a long time because they spread their risks effectively. Every successful investor diversifies risk. Returns are not in your control but risk is definitely in your control.  Successful investors always focus on risk-adjusted returns. In the world of investing, success is always relative.

Habit 3: Be a taskmaster when it comes to costs and execution

Investors often tend to ignore costs and execution in the erroneous belief that such mundane aspects only matter to traders. In fact, investors must be obsessed with costs and execution as a force of habit. Try to get the best execution at the lowest possible price. In a competitive market that is entirely possible. If you really want more value for your investments, then costs and execution matter a lot. Over longer time frames, these two aspects can make a perceptible difference to your return on investment.

Habit 4: Post tax returns is the bottom line

As a savvy investor, always focus on post-tax returns. If you are making a profit of 40% on a stock and sell it before 1 year, your post tax-return will be just 33%. Play the STCG versus LTCG game very carefully. Also look to farm losses wherever possible so that you reduce your tax outflow. Dividends (and now buybacks too) have a tax trade-off. Consider factors like DDT, buyback tax etc before making an investment decision. Taxes can alter net returns in a significant way.

Habit 5: There is no substitute for research and insights

If you want to be a successful investor, you must spend time in becoming an expert on the company, the industry it operates in and also on its technicals. That may sound far-fetched but that is essential. The more incisive your research and the deeper your understanding; your chances of hitting bull’s eye will improve. This is the golden rule.

Get down to granular details. Is the company’s sales growth getting constricted? What are the competitive threats that are emerging? Has the company created entry barriers? What can the company do to improve its growth and its ROI? Are there disruptive influences in the sector? The list can go on; but these are the kind of probing questions you need to ask.

Habit 6: Focus more on the business and less on the stock price

Peter Lynch rightly said, “Behind every stock there is a business. Try to understand the business”. Charts and price levels are the icing on the cake; not the cake itself. Big investment ideas can only happen if you focus on how the business is adding value to its shareholders. This is surely complicated. Product life cycles are getting shorter and markets are getting more competitive. Keep questioning the USP of the company.

Habit 7: Let logic be the driver; but when in doubt go with your gut

Good investors should let their head rule their hearts. For starters, don’t fall in love with stocks just because they have done well in the past. When it comes to investments, the best decisions are always taken by cold logic and analysis. When you let your head do the job, you are less likely to take buy and sell decisions in moments of sentimental weakness. Quite often, you will still be in the zone of uncertainty after all these efforts. That is the time to go with your gut!

A strict adherence to these 7 habits can surely make a big difference to your investment performance.

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Habits You Need to follow to be a Successful Investor

10 Oct 2019

Most of us open a trading account with a broker with the aim of becoming a successful investor and, perhaps, finding the next Eicher or Infosys. Share trading and investing is not just about knowledge and insights but lot more about specific psychological and mental traits that you need to cultivate. There is no royal route to being a successful investor. Your best bet is to imbibe some key traits of becoming a successful investor and gradually build them into a force of habit.

Your trading account is just your gateway to becoming a successful investor. You can actually become a consistently successful investor when share trading becomes a force of habit built on smart principles. Here are habits that can make a world of difference to your success as an investor.

Habit 1: Take a long term view and stick to your plan

More often than not, patience is at the core of being a successful investor. But to be patient you must have a long term plan. Above all, you must have the consistency and discipline to adhere to this plan. For example, you cannot buy a futuristic idea at a bargain price and expect to earn supernormal profits in a year. Companies like Infosys, Bharti, HDFC Bank and Eicher consolidated for long periods of time before giving a major breakout. Make patience your first habit and don’t keep switching your investment philosophy.

Habit 2: Risk management is mandatory; so spread your risk

Sceptics often argue that Buffett and Lynch made their profits in a handful of stocks. What they forget is that these marquee investors could survive for such a long time because they spread their risks effectively. Every successful investor diversifies risk. Returns are not in your control but risk is definitely in your control.  Successful investors always focus on risk-adjusted returns. In the world of investing, success is always relative.

Habit 3: Be a taskmaster when it comes to costs and execution

Investors often tend to ignore costs and execution in the erroneous belief that such mundane aspects only matter to traders. In fact, investors must be obsessed with costs and execution as a force of habit. Try to get the best execution at the lowest possible price. In a competitive market that is entirely possible. If you really want more value for your investments, then costs and execution matter a lot. Over longer time frames, these two aspects can make a perceptible difference to your return on investment.

Habit 4: Post tax returns is the bottom line

As a savvy investor, always focus on post-tax returns. If you are making a profit of 40% on a stock and sell it before 1 year, your post tax-return will be just 33%. Play the STCG versus LTCG game very carefully. Also look to farm losses wherever possible so that you reduce your tax outflow. Dividends (and now buybacks too) have a tax trade-off. Consider factors like DDT, buyback tax etc before making an investment decision. Taxes can alter net returns in a significant way.

Habit 5: There is no substitute for research and insights

If you want to be a successful investor, you must spend time in becoming an expert on the company, the industry it operates in and also on its technicals. That may sound far-fetched but that is essential. The more incisive your research and the deeper your understanding; your chances of hitting bull’s eye will improve. This is the golden rule.

Get down to granular details. Is the company’s sales growth getting constricted? What are the competitive threats that are emerging? Has the company created entry barriers? What can the company do to improve its growth and its ROI? Are there disruptive influences in the sector? The list can go on; but these are the kind of probing questions you need to ask.

Habit 6: Focus more on the business and less on the stock price

Peter Lynch rightly said, “Behind every stock there is a business. Try to understand the business”. Charts and price levels are the icing on the cake; not the cake itself. Big investment ideas can only happen if you focus on how the business is adding value to its shareholders. This is surely complicated. Product life cycles are getting shorter and markets are getting more competitive. Keep questioning the USP of the company.

Habit 7: Let logic be the driver; but when in doubt go with your gut

Good investors should let their head rule their hearts. For starters, don’t fall in love with stocks just because they have done well in the past. When it comes to investments, the best decisions are always taken by cold logic and analysis. When you let your head do the job, you are less likely to take buy and sell decisions in moments of sentimental weakness. Quite often, you will still be in the zone of uncertainty after all these efforts. That is the time to go with your gut!

A strict adherence to these 7 habits can surely make a big difference to your investment performance.