Most new investors come with dreams of making a lot of money in the stock market. They invest in stocks that are recommended on business channels (like CNBC) or they buy stocks that are suggested on WhatsApp, Telegram, Facebook etc.
After buying – the stock either goes up or falls down. If it falls, the investor becomes hopeful of getting back the price they paid. If the stock rises in value, the inexperienced and impatient investor tries to book small profit.
While this approach could help you make some quick money – you will not do well in the long run.
The stock market is not a place for people without knowledge. If you come here to make quick easy money – all the money you made in the bull market, will be taken back.
The right approach is to spend the first 1-2 years learning, without investing too much of your hard-earned money.
Once you gain knowledge, the market will teach you 3 important lessons:
1. Hold Your Winners
Don’t be in a hurry to sell stocks that are in profit, especially those of good companies that have a track record of performing well in the last 5-10 years.
If you find a steady compounder, don’t sell it for a small profit.
Greed to get rich quick, could make you sell quality companies and buy weaker stocks that have been rising very fast in the recent past. The end result, in most cases, will not be good.
2. Buy more of your winners
If a stock has given you good returns, the biggest issue you will face is – you can’t buy more of the same stock. You will end up searching for new names.
For example, if you bought Bajaj Finance at 800 rupees in 2016 and it went up to ₹ 2900 in 2018, you should’ve ideally added more when the stock fell by more than 30% to less than ₹ 2000 during the NBFC crisis in October 2018.
Bajaj Finance gave another chance in the 2020 Covid crash. It went back to ₹ 2000 levels. The stock has now tripled and crossed ₹ 6000.
Averaging up in a quality company like Bajaj Finance – when it gives good opportunities – would’ve give you big returns.
Good companies can fall because of industry-wide crisis or extreme temporary reaction to announcements like demonetisation or the unexpected Covid pandemic . When such companies fall, it’s time to buy more shares. Share prices of good companies or industry leaders are the first to rise.
3. Sell your losers
If you have a stock in your portfolio that has been steadily falling, it could be time to book loss. This is another mental block that most inexperienced investors face. The inability to take a loss is a bad habit that you should get rid of.
You will notice that a stock in your portfolio that falls by 50%, usually ends up falling even more. Eventually you lose hope and keep it in your portfolio, hoping that some day the stock will recover. In most cases, they never recover.
Example of such companies are Reliance Power, Sintex Plastics, Unitech, DHFL, Vakrangee, Yes Bank etc.
Do your analysis, read on the internet; if there are reports that the company is in trouble or is involved in some sort of scam, sell the stock as soon as possible, even if you are in heavy losses.
Selling these stocks immediately will, in most cases, turn out to be the right decision.