5 key points for a smart investor before they start trading in stocks

5 key points for a smart investor before they start trading in stocks

by 5paisa Research Team Last Updated: Dec 11, 2022 - 12:43 am 155.8k Views

Benjamin Graham, known as the Father of Value Investing, once described how an “intelligent investor” should invest in the share market. “A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock market analysts. But it is absurd to think that the general public can ever make money out of market forecasts,” Graham said.

In a market that is constantly changing at a rapid pace, what you require is not just intelligence but also smartness, pragmatism, and fleet-footedness. Stock market investing is not just about stock tips and market tips. True investors focus on how to invest in the share markets with a smart strategy.

Here are five key points for the smart investor to keep in mind before embarking on his investing journey.

1. Don’t try to experience everything; rather learn from the experience of others

There is much wisdom in the market but if you plan to experience all of it by yourself, it will take you a long time. A smart investor should ideally learn from the mistakes and experiences of others. When NBFCs crashed, the learning was not to bet on companies with liquidity problems. Similarly, there were stocks like Manpasand Beverages that got belted due to corporate governance issues. You must immediately draw your lessons from such situations.

2. Keep an ear on the grapevine, but trade with your own conviction

On any given trading day, the markets are deluged with information, making it very difficult to differentiate between information, insight, and noise. Rule number one is never to ignore any news or information unless you are convinced it is just a rumour or hearsay. Most rumours are based on some truth and could possibly give you clues about your future trade. For example, the WhatsApp flows on Dewan Housing Finance (DHFL) and Infibeam were doing the rounds even before the stocks corrected, giving people a good opportunity to crosscheck the data and take action. So keep an ear to the ground but base your decisions on your conviction.

3. Time and tide wait for none; so make the best of NOW…

In the stock markets, one cannot wait forever just to be fully sure about something. The stock markets are volatile and uncertain. Logic and analysis will only take you so far, but beyond that, you must take a leap of faith and leave to your risk management framework to take care of the rest.

If you are looking at a phased approach to investing, then a few higher price points don’t make a big difference. The sooner you start the investment process, the better it is. You can only wait up to a point. Also, don’t consult too many sources. Your conviction works best as you have no one to blame if your trade goes sour, and only yourself to praise when it goes well. If you have done your homework and think you can go ahead with a trade, then believe in yourself and take the plunge.

4. Spread your risk, but be smart about it

In the stock markets, the best way to enhance returns is to reduce risk. That is managed by spreading risk. The most important thing that a smart investor does is spread risk. You can call it diversification or you can call it tweaking your portfolio ahead of key events. The bottom-line is that you are trying to reduce your risk to the extent possible. There are two aspects to spreading risk. When you spread risk, there is a cost in terms of forsaken returns; you need to be prepared for that. Secondly, spreading risk beyond a point is meaningless as it leads to risk substitution rather than risk mitigation.

5. Ask yourself: Is the company doing something different or something differently?

Some call it an entry barrier, some call it innovation, and others call it a moat. What smart investors need to constantly ask themselves is whether a company is bringing something new to the market or innovating any of its existing products. Hero Moto took a different approach to the transport business just as HDFC and ICICI Bank started off with technology-driven banking. Similarly, you need to identify a new niche and cater to it. Unless the company is able to do that, it is likely to lose value in the future. In fact, Jio shows the ability of Reliance to create an innovative delivery even with such stiff competition in the sector. Focus on stocks that really have a niche and you’ll be well-off for most parts.

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