In this decade, equity markets have given us an opportunity to enter and create wealth, unlike other popular avenues like real estate (a big burden on the working class) and gold (it has given moderate to high single-digit returns over many years). However, to make trading work for an investor, there are some things one must know. There are three important skills for making one's money work in the stock markets:

Knowledge

Money

Patience

Simply put (KMP theory gives you a balance as follows):

Have the right set of knowledge to enter the Equity market.

Invest your money when the valuation is cheap.

Have the patience to hold on to your stocks till the story gets over.

Fear and greed are your friends in the equity market, if you know how to use them. If you are a trader in this market you will surely not make money, you may make 10 percent in one to two months from your capital invested if you do intraday and short term trading and this also comes with the risk of burning your capital if stop loss is not set or if you have borrowed to invest in this market. Trading also creates a lot of anxiety and confusion if your strategy goes wrong and for most working individuals trading and office/family work is the perfect combination for a “planned disaster”.

How many times you must have planned not to take a trade but ended up trading more than your allocated capital.

How many times you traded and added stocks which were not planned to be part of your portfolio, only because your brain told you to not book losses.

How many times you SOLD and tried to time the market to buy at lower levels, but it backfired, and you could not carry forward your position.

How many times you traded and took a break only to find that markets corrected suddenly, and all your positions got squared off and you made losses= profit earned in the last few days (sometimes losses = profit earned in many months).

The moral of the story:

Trading is for unsettled people; investment is for people who would like to live a royal lifestyle.

Let me tell you how.

Take an instance of one of the weekdays, when you placed a trade and the stock ran up two percent and you booked your profits, your chest must be swelling in pride that day and if you were lucky you would have bought and sold the same counter (out of experience) to make another two percent, so assume your investment capital was 1 lakh and you made 4000 in just an hour's time.

Later, you switched your focus to more stocks during the day, made some money in some counters, lost in some and ended your day. After some days you check the same stock and are surprised to see that it has jumped up 15 percent or as little as 10 percent from the day you traded in the stock. However, you lost out on the extra six percent profit. Such is the dilemma of a trader and post-trade dissonance gives a regretful feeling and here is why it is recommended you become an investor in a rising bull market. Remember even a falling bull market or markets witnessing policy paralyses may not perform and investors may shift to cash or other avenues but this article is aimed at a typical bull market where investors earn from the growing economy.

A rising bull market gives you wings to perform if you stay invested and not jump from one stock to another just because you got a tip, your friend asked you to buy a new stock, a new IPO bloomed in front of you, herd mentality took a toll on your decision making.

If you stick to the three mantras as follows you are surely going to create wealth for the medium to long term:

Knowledge:

Have the correct knowledge partner, maybe two good websites, one good news channel, or two books that you feel gives you enough knowledge about the market. Think about equity markets as if you were to learn a new sport. You would tend to read about the sport before going to the field to play right, do the same thing. But don’t overcrowd your brain with too much information. Select few good informative sites to check on the fundamental and technical knowledge platforms.

Money: Ensure you are not having any commitment before investing in equity markets or your current commitments are already taken care of ( EMIs, fees, expenses), etc. Once you decide to invest in the equity market choose the right sectors and allocate your capital as per the 15/6 theory. Choose 15 good companies from different sectors like IT, FMCG, Pharma, Chemicals, private banks/NBFCs and Auto ancillaries and invest a maximum 6 percent in them. If you succeed on 80 percent of the right companies picked 12/15 stocks would have the right allocation amount and you would win. Whereas if you spread too thin or make it too concentrated then you may tend to wobble your portfolio and you have to rethink your strategy and this will lead to a loss of time. So choose the 15/6 theory or if you have more knowledge and conviction the 10/10 theory.

Also don’t invest all at one go, when you dive into a swimming pool, you don’t tend to jump in from 4 feet right, you test the water, experiment the temperature get accustomed and once you have the comfort of the risk you swim deeper and enjoy the experience. Stock markets are similar, before investing do your own research, understand the triggers for growth for the sector and company, its valuations ( how many times is the share price a multiple of EPS); Ask questions like why would the EPS grow, why would the profits grow, will it sustain? What are the sector tailwinds?. What are the external risks? Evaluate most of these points and then invest.

Remember the golden rule:

“You may know the right company, but it may not create wealth for you if you have bought it at very expensive valuations”, the wait will only be longer.”

Patience: After gaining knowledge and putting the right allocation of funds (diversification), the next best thing to do is to wait. If you keep opening the fridge to check ice cream is set then the wait will only be longer, stock markets are similar. The right investment in the right companies and then sit tight, wait for the stock to perform. Don’t get disturbed by the external events, add more quantities to your stocks if the price drops by 15 to 20 percent. If you buy mutual funds the SIP works as an average of the NAV right? Use the same principles for your equity portfolio. If there is continuous underperformance review the company and sector and take a call to exit, but keep the star performers in the portfolio and don’t sell them.

Remember profit booking is like pleasure, and wealth creation is happiness, invest that sum of money that you don’t need and allow it to grow. Do book some profits to enjoy your life and achieve your goals as well, but largely keep your portfolio stable and review them so that wealth compounds for you when you are sleeping.

—The author, Ravi Viswanathan works in HUL's key account management team and follows stock markets. The views expressed are personal

(Edited by : Ajay Vaishnav)

First Published:Apr 2, 2021 1:40 PM IST