Equity Basics: Don’t panic in falling and rising market

Today, investing in equity of organized businesses is seen as a potential source of steady additional income. College students, government employees, small businessmen, people living in semi-urban areas, etc. are increasingly adopting equity investment as one of the primary tools for wealth creation. However, there is a section of people who look at equities as a means for quick gratification. They indulge in equity trading for making big gains quickly. This urge to get “lottery” effect from equity investing invariably results in significant loss of capital and disappointment.

Basic Features of Equity Investment:

• Take a business perspective: Equity investment is most profitable when it is almost like a business.
• Your investment in equity shares of any company carries the same risk, as the risk contained in the company’s business. All economic, social, financial, political, and international changes that affect the business of the company would affect your investment also.
• Do not gamble: Due to uncertainty of returns, the risk is always an integral part of investing in equity shares. Notwithstanding the uncertainty, you invest because you are confident about the future prospects, and you have faith in the capabilities of the management. You are taking a calculated risk and speculating about the expected return. But when you invest in a company on the basis of a ‘tip’ or ‘intuition’, without any knowledge about the company, its business, or the management, you are gambling.
• Do not panic: Never panic in the falling markets. Similarly, never panic in the rising market.
• The most significant characteristic, which distinguishes a successful businessman from an ordinary businessman, is the ability to transform adverse situations into opportunities. This can be done if you do not panic in adverse situations.

The same principle applies to equity investment also. Investors who did not panic during the ‘great-falls’ have historically made greater profits than those who did.

Information is important: Intelligent investing requires correct information. If you want to maximize your returns from the investments, you probably can not afford to ignore changes in demographic trends, economic policies, tax laws, and international developments. If you were careful in selecting your Advisor, you have done 90% of your job. By charging a few rupees extra in Advisory Fees, a good Advisor insures you against loss due to Misinformation and No-information.

Expect a reasonable return: To be a successful investor, you have to be reasonable in your expectations. An expectation of a 25-30%-annualized return is certainly going to disappoint you. This dissatisfaction probably leads to frequent changes in portfolio and losses.

In short term, you may earn anywhere from 10% to 10 times on your investments. But in long term, a Return of Inflation plus 5% to 6% should be considered reasonable.

Do not diversify your portfolio too much: Consider investing in a Mutual Fund with a more diversified portfolio.
There are two schools of thought on the strategies for designing a profitable portfolio. One: ‘Do not put all your eggs in one basket, and two: select a few companies carefully and invest in the best.

Well if you could identify Infosys Technologies 25 years ago and put all your eggs in that basket, you might have made enough money to take care of most of your future needs. But if you had found Suzlon very attractive in 2007, and put all your eggs in that basket, you have lost all your eggs with no trace of the basket.

Look at total returns: The success of the investment strategy should be gauged from the total returns you made on your entire portfolio.

It is not necessary that you will always make the right choice while selecting a stock. Some of your selections are bound to be wrong or not as good as you expected them to be.

Remain in the market: Keep tracking your portfolio constantly and shuffle it as things change or new stories emerge, without actually liquidating your portfolio. Liquidating your investment and going into cash would mean getting out of the market. “The Entrance Strategy is actually more important than the Exit Strategy.”

Views are personal: The author Rajesh Bansal is the Managing Director at Risk and Asset.

Disclaimer: The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same.The views expressed in this article / video are in no way trying to predict the markets or to time them.The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd.will not be liable in any manner for the consequences of such action taken by you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.