In his piece “Here’s how you can make big money from small stock investments” Sanjay Kumar Singh has profiled a few amateur investors who have discovered the secret formula to finding winning stocks.
Sanjay first points out that the reason amateur investors fail in the stock market is because they buy stocks only at the fag end of the rally. Also, their investment decisions are based on tips from brokers, friends and experts on television shows. They don’t research the stocks they buy, nor do they diversify their portfolios. They also tend to sell off their winners early and hold on to losers endlessly. Little wonder that for most retail investors, the stock market is a zero sum game, he says.
However, he then profiles real life people like you and me who have made extraordinary gains from stock investments.
The eight investors profiled are Venkatesh Kumar, 40 (portfolio value Rs. 27 lakh), S.G. Raja Sekharan, 52 (portfolio value Rs. 1 crore), Hari Krishnan, 33 (portfolio value Rs. 23 lakh), T. S. Ramchandran, 55 (portfolio value Rs. 30 lakh), Subash Nayak, 31 (portfolio value Rs. 33 lakh), Ravi Mahalingam, 41 (portfolio value Rs. 40 lakh), T.V. Rajalakshmi, 42 (portfolio value Rs. 4.50 crore) and Vivek Gautam, 45 (portfolio value Rs. 1 crore).
Interestingly, each investor started his investment journey on the wrong note – by incurring heavy losses due to bad choices. However, instead of getting disheartened, each of them understood that their technique was to blame for the losses and not the stock market.
Once the realization dawned on them that their losses in the stock market was caused by poor stock selection, knee-jerk reactions and lack of foresight and discipline, it was smooth sailing for the enlightened bunch of super investors.
Each of the investors has set out in detail the mistakes that he or she made and the strategy that they now adopt to ensure consistent success in the stock market.
Their advice can be distilled into a few actionable points:
(i) Never buy a stock unless you have fully understood its fundamentals and growth prospects. For this, you have to read annual reports and analysts’ reports;
(ii) Don’t buy (or sell) on an impulse. Don’t react to short-term “noise”. Avoid knee-jerk reactions;
(iii) Keep an eye on the valuations and what you are paying for the stock. Don’t buy a stock only because it is “cheap”. At the same time, don’t ignore a stock because it looks “expensive”;
(iv) Insist on buying quality stocks. Generally speaking, a good stock at a high price is a better investment than an average stock at a very attractive valuation;
(v) Once you are sure you have bought a stock with good fundamentals, be patient. The minimum holding period should be 3 to 5 years for compounding to work its magic;
(vi) Don’t sell a winning stock unless the fundamentals of the company or business have deteriorated or the stock is extravagantly priced;
(vii) Keep a concentrated portfolio of not more than 10-15 stocks (with a minimum 5% allocation to each stock). This will force you to pick only the best stocks and also enable you to track them closely;
What is remarkable is that the advice given by these amateur investors is similar to the advice given by stalwarts like Basant Maheshwari and Akash Prakash of Amansa Capital. We need to pay serious attention to it and implement it in our day to day life.