Investing in stocks can be rewarding

I would start with the quote from a Bill Gates -

“Most people overestimate what they can do in one year and underestimate what they can do you in a ten years”

Investing in markets can be highly rewarding beyond your imagination if you have the right mindset -

• Be a student

• Identify areas with positive outlook

• Understand your risk threshold

• Courage

• Be long

Be a student:

Its a crucial phase of your learning where you spend a lot of time day in and day out learning about investing strategies from great investors. You would have to dig deep to understand what happened in history and how it affected the returns of a company. There is a saying by Mark twain: "History does not repeat itself but it often rhymes".

Some of the questions that might intrigue you are:

1. What's my investing strategy?

   1. Value Investing (Old Method) - Buy cheap and sell when fully valued

   2. Value Investing (New Method) - Buy quality at fair price and hold for long term

   3. Growth Investing

   4. Dividend Investing

   5. Swing trading

   6. Day Trading

   7. Indexing etc...

2. What were the mistakes done by great investors and how to avoid them in your investments.(Learning from others mistake is the best way to avoid capital losses).

3. What stage of market cycle are we in? (Market moves in cycles)

4. Whats your risk tolerance capability?

5. What do you want of out stock market investments?

I would be shedding light on some of my learnings for the above questions in the future series of articles.

Sources that help me to be a good student are -

• Listen to speeches from great investors like - Howard Marks, Mohnish Pabrai, Guy Spier, Seth Klarman, Charlie Munger, Li Lu, Chamath Palihapitiya, Bill Ackman and of course the great Warren Buffet (you can easily find tons of content online on youtube)

• Talk Series on Youtube are some excellent sources as well:

  • Investors at Google

  • Ben Graham Center for value investing

The most important thing: Once you get into stock market you have to be a student all your life:) The people with passion to learn businesses and apply learnings overtime have found rich rewards.

Identify areas with positive outlook:

Knowing where to invest is vital as it can amply your returns heavily. You need to have a basic understanding of where the world would be heading in 5 to 10 years time. Its very simple and not a complicated process. Think of future of the world in your circle of competence. If you dont know whats your circle of competence then you can start reading about a sector that might be a big change in coming years.

• EV is a good space (only 2% of the world is electrified as of 2020)

• Space is a good sector (its picking up)

• Growing population in the world and its impact

• Healthcare is evolving with new technologies

• Blockchain

• Disruption in banking might be on the cards

• Emerging Markets - India and China have good prospects

• Commodity

• E-commerce etc...

Look around you and I am sure there will be some sector/area that might be an advantage to you as an investor. Go deep and learn everything about it. Learn how the companies make money; Which is the best company in the sector; Whats the projection of growth of the sector, Are the management big stakeholders in the success of the company etc. This type of learning will give you an edge over other investors.

Identifying the sector or a company early in their growth cycle would be a of tremendous advantage. There is a saying - "What the wise man does in the beginning, the fool does in the end". Its always wise to be invested in a company that has excellent growth runway. On the other hand industries like newspaper, malls are on a declining trend, even if you find some great company in these industries you might not be able enjoy the compounding growth as the sector itself is shrinking. You basically need to own companies in sector that has long runway.

Understand your risk threshold :

You might be a little adventures with your investing when you are in your 20's than when you are in your 60's. And it might be also be a matter of what you want from stock market. Knowing how much to invest and how much of downside you can stomach should also be considered. This is extremely important as you face unavoidable events in stock market like correction, recession and depression and you might see your equity lose value very very quickly. What's required of you is a calm mindset and not to panic with the market when these episodes occur. All you need to know is if the story behind your investment is intact or not; if it is then its time to double down and buy more.

Having a bullish and bearish thesis on a potential investment is a good way to go about during your market research. Knowing the risk reward is the key to make educated bets. Some might minimize the risk by diversification and that's also a personal choice based on your required market returns.

Using leverage might be desired by a few to get rich quick but that also increase the risk of getting wiped out. A lot of naive investors and money managers get wiped out during the hard times. Aptly put by Warren - "Only when the tide goes out do you discover who's been swimming naked". Get rich quick are not sustainable way to be an investor in the market.

Do not risk your life savings on somethings that's hot in the market. So often we notice people just jumping into something that an influencer they follow on youtube, friends or colleagues suggest without doing any due diligence. On most occasions this turns out to be a costly experience. You have to make up your mind to only invest after through research of your own as it your personal money. Please only make bets that you have conviction on making good returns for you.

I have added an article to help you determine the financial bucket you belong. Understanding where are you financially would help you gauge you risk threshold as well.

Courage:

Lets say you have done your research and have identified an investment that has a very positive risk reward and has relatively cheap valuation. You expect the company to outperform and grow cashflow in years to come. You know everything about the company and the sector; There is a very slim chance that you might have some downside. At this stage if you bet low then your returns might not be excellent.

You need to invest heavily on something that gives you greater confidence and not bet low. And when there is fear in the market not betting heavily on quality companies with excellent cashflow or cash would be a missed opportunity. If you are in the market you need to take a few educated bets to enhance your returns. This strategy has served well for a lot of billionaires during their early days.

Go big when odds are in your favor to outperform, Courage does a play part in your investment journey.

Be Long:

Every great investor or billionaires have made money by being long. What you are buying in a stock market is a business and not a ticker symbol whose price fluctuates every minute. You need to think like owner of the business when you own a stock. Its extremely important that you let the investment story play out. For the business to give you returns you need to give it time. Dont panic or move investments in a hurry to something else on getting some appreciations, short terms returns are not tax efficient. Be long to not only get greater returns as there could be exuberance in the market but are also tax efficient ways to grow wealth.

You could see effects of compounding playing out over the long terms by being long. Its extremely hard for anybody to do short term trades and average well over a long term period. You need to digest the dips and corrections when you are long and also analyze if the business is attractive to add more to your portfolio during downturns. Its easier said than done; but its important to stay put and wait.

Conclusion:

To summarize you need to develop a mindset that can go through the ups and downs of stock market without much action. The mantra is simple -

"Identify a great business as early as possible: Bet big and be long"

Thats all it takes to grow your wealth and become financially free.

Disclaimer: The article is my opinion and is not meant as a investment advice. Please do you own investment research and follow approach that suits you best. Good luck!