(1) Water the flowers & Cut the weeds
We covered this in detail here. The other way to put it: Sell the Losers and Ride the Winners. At periodical intervals, you must objectively and critically analyze your portfolio and evaluate the performamnce of the stocks in it. If a stock has done well, then why is it so? Is the outperformance likely to continue in the foreseeable future? Should one add more at the current price. On the other hand, if a stock price has plunged, it is because of permanent factors or temporary blips on the radar? Is it time to dump the stock and invest the procceds in the winning stocks?
(2) Do thorough research before investing:
Shankar Sharma put it very well “investors must be conservative and scared of the stock markets“. The stock market is not a place for the foolhardy person who likes to deploy his precious funds based on “hot tips” from all the sundry. One can listen to the so-called “hot tip” but before acting on it, he must do his own thorough research and analysis. It is always better to be conservative and not invest if one is not thoroughly convinced. As Warren Buffet said, Rule No. 1 is to preserve capital. And Rule No. 2 is to never forget Rule No. 1.
(3) Keep your eye on the big picture:
Rakesh Jhunjhunwala put it very well “Don’t get obsessed by short-term fluctuations in the performance of the company. Keep your eye, not on the profits, but on the source of the profits“. Just because a stock has performed well in one quarter is no reason to go and rush to buy the stock if the profits are a one-time affair and not sustainable. Likewise, a dip in performance in one or two quarters is no reason to dump the stock in panic.
(4) Don’t chase pennystocks in the hope that they will become multibaggers:
Naive investors have a fascination with “pennystocks“. They are obsessed that these stocks that are quoting at just a few rupees each will double and treble in no time and become multibaggers. Rakesh Jhunjhunwala cautions that nothing can be farther from the truth. There is a reason why such stocks are quoting at low valautions. May be the fundamentals are poor or the management has a dubious credibility. Whatever, the fact that a stock is a “pennystock” is never a good reason to buy it.
(5) Don’t be greedy. Have patience:
This is probably the most important piece of Rakesh Jhunjhunwala’s advice. In our obsession to get rich quickly and investing in dubious stocks, we completely forget the basic tenets of investing. Did you know that a stock growing at “just” 25% per annum multiplies your money 86 times in 20 years. In other words, Rs. 10 lakhs invested today in a solid blue chip stock becomes 8.60 crores in 20 years. A stock growing at 15 times multiplies the investment 16 times in 20 years. So, the best thing to do is to hold on to blue chip stocks and stick with them through thick and thin to get a multibagger. Warren Buffet gives the classic example of Coca-Cola to prove his point. If you had bought just one share at the time of its IPO and invested the dividends in the stock, your investment would be worth $5 Million today!