Mantras

Even the best investment professional must expect that not more than 2/3rd of his decisions will prove to be above average in profits. Therefore asset allocations and diversification are the foundation stones of successful long term investment.                  John Templeton

4 Golden Rules Before You Invest In Stocks

Rule 1: Study the tips before investing

Do the litmus test. Before you invest, test the tips suggested by analysts for a certain period of time before you take the plunge. 

Most brokerage houses provide stock tips for no charge. They claim to have large research teams and churn out a large number of reports, yet provide it free of cost as a value added service. How do you think they sustain? They make money out of you; the more you trade, more money they make irrespective of whether you make money or not. 

Rule 2: Research before you invest, not after!

Research the stock picks before investing. Also, ask your broker for detailed reports on the picks. Invest only if you are convinced that the long term prospects are good and if the company has a good long-term competitive advantage. Do not waste your time on tips that give you a trigger price and target price. 

Rule 3: What goes up faster, comes down faster

Any statistics that you would have read in the peak would have had strong rationale for growth. However, be a little cautious when stocks/sectors have run up too much. High P/E multiples indicate that the stock market is discounting very high growth rates of the company in the future. It is difficult for a company to continuously maintain such high growth rates as the company keeps growing larger. The stocks could be re-rated downwards if the growth outlook for the stock changes in the market. A perfect example of this was in 2000. Technology companies were growing profits at 70-100% for a few years. Companies like Wipro and Infosys did not make a loss or even post lower profits. Their guidance was that profits will grow around 30-35% and this led to a significant drop in share price. 

Rule 4: If you don’t have the time, use mutual funds

If you do not have the time to track each stock in your portfolio, do not invest directly in the equity market. Investing through the mutual funds in a Systematic Investment Plan can create significant value without having to get into detail on your individual stocks.

Dow Theory