Introduction
There is no “best way” to make more money in the stock market. If you are going to learn how to invest in stocks, be careful. Do your homework, gain some financial advice and watch your investments all the time. Over time, you will figure out how to achieve financial freedom which will enable you to enjoy a more comfortable lifestyle! Here are 7 Investing Tips to Become a Successful Investor.
1. Long term Investment strategy
One of the basic things you need to do to be a successful investor is to have a long term strategy. Successful investment strategies are all about themes that hold you in the long run. As an investor you goal is to primarily combine the best of growth and value. Growth companies are the ones that will give you the virtuous cycle of positive price movement, P/E re-rating and profit growth to match up with these valuation re-ratings.
While it’s easy to get caught up in the ups and downs of the market, it’s also important to think about how much of your income you are putting away for the future. Saving early and often can be a powerful force when it comes to making progress toward long-term financial goals.
A solid investment strategy is based on 2 key approaches. Firstly, you adopt a value approach and try to buy into future leaders at low valuations. Once the company starts performing, the valuations start going up and that is when you need to treat it is a growth stock. Most important thing is not to waver in this investment approach.
2. Risk Management
There is a slight dichotomy here. Successful investors may tell you that most of their money was made in just a few stocks. That is absolutely true! But to survive long enough in the markets to make money you need to ensure that your risk is diligently managed. That is where diversification comes in. Too much concentration can destroy your equity portfolio and hence your risk needs to be constantly monitored. Irrespective of whether you are a trader or an investor, one of your key goals is to preserve capital and that can only be done by diversifying your risk.
Distrust anyone who claims to predict the future and provides you any financial advice through “foresight”, since all financial outcomes are loaded with uncertainty. If you want to learn how to invest money successfully, you must understand that this means that every investment is a gamble of some kind. No one can tell you with accuracy what is going to happen in the future with regard to any stock or investment. Everyone is guessing the very best they know how.
3. Never try to over-trade in the market and keep an eye on costs.
These are 2 different issues but have important implications. Your journey of how to become a successful investor begins with managing your costs. Costs have a variety of implications. There are transaction costs, there are regulatory costs, there is cost of missed opportunities and there is the taxation cost. Successful investment strategies are all about keeping your costs to the bare minimum. In the long haul, it makes a big difference to your portfolio.
4. Hard core Research
One of the most critical out of the 7 habits of highly successful investors is the ability to identify good stocks. It is not just about entering into a stock but also about timing your entry. Over the last 10 years, if you had bought into any of the downturns, your returns would have been substantially superior. Before you invest, understand the company, its business model, its core competition, and threats of disruption, check if the company has a moat and a margin of safety, focus on intangible assets etc.
Successful investment strategies are all about identifying the right stock and entering at the right time. Focus on how best you can do it and don’t worry about catching the bottom and top of any stock. Luck is the most powerful single factor in learning to make more money and invest successfully. Because there are no predictable patterns for investing in the stock market, for you to be successful, you need a lot of luck.
5. Optimum Utilization of Funds
How to become a successful investor in stock markets is all about cutting out your losing positions. A good investor never averages positions in the hope that the stock will bounce back. It is all about conviction. The best of investors can only get 70% of their calls right. For the remaining 30% duds in your portfolio, you need to ensure that it does not unnecessarily eat up your resources and your time creating opportunity losses in the process.
There are many types of investments available in most countries. They all come with their own levels of risk and reward. I strongly advise that you look around and educate yourself so that you may find safe investments that provide you with your desired level of reliability and payout.
6. Run your profits as long as you can.
Of the 7 habits of highly successful investors, this is what separates the winners from the ultra-winners. Focus on your conviction and don’t be driven by the percentage returns that you have earned. An investment in Wipro worth Rs.10,000 in 1980 became almost Rs.300 crore by 1999. Therefore, how to become a successful investor in share markets is all about that indefatigable conviction and the patience to let profits run as long as possible.
Optimism means expecting the best, but confidence comes from knowing how you will handle the worst. To put it another way, confidence springs from the constructive use of pessimism.
7. As an investor your focus should be on risk-premiums.
Successful investment strategies are all about buying into risk premiums. You cannot become a successful investor without taking on risk. Great trades in the world like Tudor Jones buying on Black Friday in 1987 or John Paulson shorting sub-prime in 2006-07 are all trades about risk-premiums. As an investor you get many opportunities to make decent money and a handful of opportunities to make big money. It is these big opportunities that will really position you as a successful investor and it is all about focusing on the risk premium. That means the returns are likely to be infinitely larger than the risk that you are taking on.
