Many investors burn their fingers in the stock market because they blindly follow tips and advice freely available. They do not follow a process or have a discipline to cross-check the facts and invest directly. In the second exclusive workshop on ‘How to Invest Safely in Stocks’ conducted by Moneylife Foundation, Debashis Basu, editor, Moneylife, covered the main reasons why investors lose money in stocks, the myths and facts about stocks, how one can develop a process of investing and winning strategies one could adopt. Most investors usually have no clue about the financials of the company or how a company is expected to perform. Though a company may be fundamentally strong, it could be highly priced and thus price appreciation would be low. Even if an investor knows how and when to invest, exiting at the right time is also extremely crucial.
There is lot of free advice available all over the internet. Some may be good, while most of the other is just noise and these sources do not have adequate data to prove their stance. Thus, investors following the latter source may have false beliefs of the stock market, inflation and GDP is correlated to the stock market movement being one example. All these can be both right and wrong as certain rules work under certain conditions. As far as GDP growth versus stocks is concerned, there is little or no correlation. Before investing, one also needs to accept the fact that stocks are risky. “Stocks fetch higher returns in the long-term but can fall by 30%-70% in one year and may take years to recover. It takes years to understand this. You don’t need to focus on the price when you are analysing the business” said Mr Basu. If the business is good, prices will appreciate over the long-term. “Daily movement of price is pure noise,” he explained.
The two factors that essentially drive the market, said Mr Basu, are expected profit growth and valuation. Explaining these two factors he said, “Earnings growth determines the trajectory of the stock, whereas, valuation determines the profit or loss. If one can pick a stock with high earnings growth and which is under-valuated, you can almost never end up with a loss” Great businesses at low prices over a long period of time is what one should look for, he advised.
While giving the participants buying ideas, Mr Basu explained that one should look to buy good companies in market panic. He also mentioned which sectors can do well giving India’s consumption demand. “The maximum gains have come from the consumption sector”, he said. If one does not wish to try and time the market, one could invest is through a systematic investment plan.
As important as buying is, when to sell is a common predicament faced by investors. Mr Basu informed the audience on how to avoid making bad selling decisions. “If a stock has fallen 30%-40% in a fundamentally good company you should not sell unless you need the money, on the other hand you should invest more,” he said.
The session was followed by an interactive question and answer session where Moneylife Foundation members raised their queries.
This session was attended by savers across categories. If you would like to be informed of many more such events in future become a Moneylife Foundation member.