Not everyone likes equity investing. Some see it as a zero sum game, and therefore, wasteful; some equate it with gambling; some are suspicious because money seems to be made easily; some dislike anything that does not come with guarantees; and some love their deposits too much to even bother.
But there are some who simply love it, even if they don’t understand a thing about it. Trading in stocks has spread from traditional strongholds to various locations across the country, thanks to the electronic trading screen and technology.
The real story about equity investing is neither of these two extremes. Mindless trading does not make anyone rich, except for the ardent believer in luck. If a trick cannot be repeated for predictable gain, it is useless. Shunning equity as a gamble also does not help, as it shuts one’s wealth from an otherwise legitimate and democratic way to multiply it. What should an ordinary investor know and keep in mind about equity investing?
First, to invest in equity is to invest in the future of a business enterprise. There is still no surefire way to tell what the future holds. Despite all pretenses of expertise, no one can tell in advance which business will succeed and which will fail. This reality that you simply do not know how your investment will perform in the future, is what makes equity investing risky, scary, exciting or thrilling, depending on how you are wired. You should like dealing with the unknown without getting stressed about it.
Second, the many stories you hear about how someone bought a stock for a pittance and is now sitting on millions, are sickeningly one-sided. They are all products of hindsight. It is easy to look back and track how brilliantly a stock has moved over the years. An actual investor in the stock will tell you how bumpy that ride was, and how there were many points at which it was unclear whether the stock was still a winner or not. For one success story, there are a hundred failures which no one usually talks about. Be aware that no one pays you for doing nothing.
Third, there is no easy way to pick a stock. There are multiple factors at play, and you cannot tell which one will become important and which one will fade away. Those who have spent their lives analyzing stocks would have developed the expertise, and an intuitive judgment about what to look for, and how to spot the warning signs. They also cannot be too sure, but they have the experience to guide them. They know that they could go wrong, and therefore, are usually humble and quiet. Discard all tips that are dished out free.
Fourth, the decision to buy is a tough one. There is the entire universe of listed stocks to choose from, and no one knows which one will turn out to be a multibagger or what the time frame to look at is. Investors form their own selection approaches—we will call them investment theses. In a formal investment management set up, the specific reasons why a stock is being bought is written down. It is a good practice to do that, so performance is tracked in terms of what the original assumptions were. A stock trader sets a price target; a short-term investor sets a time frame; a value investor sets a margin of safety; and so on. Buying must be subject to a discipline and write down why you bought a stock.
Fifth, an ordinary investor is disadvantaged with respect to access to information and its analysis. A broking house hires and pays for databases, research, qualified manpower, and tracks stocks and sells reports. A mutual fund is able to hire brokers to serve it and offer it recommendations, apart from having in-house expertise in analysis, research, selection and portfolio management. Individual investors have to rely on publicly available information and their own homework. It is very common for highly involved individual investors to work as a group, sharing costs and discussing stocks, and undertaking extensive research on a shared basis. Online chat forums and television programmes should not be mistaken for research. Be prepared for intensive homework, else you are hoping to just get lucky.
Sixth, money is not made on single bets. Successful entrepreneurs who set up worldchanging businesses are the only exceptions to this rule. Not everyone can become the next Bill Gates or Jeff Bezos. For most of us, there is no courage or conviction to stake all that we have in a single business. We all invest in many stocks, and that is how it should be. Recognise that you are building a portfolio, and focus on its composition— what it holds and how much. Having small bets in a many stocks will not make you rich.
Seventh, when you do not know the future, and you buy based on incomplete current information, and when that does not perform, your only saving grace is the ability to accept your mistakes and cut your losses. Money is made in equity investing not from stock picking alone, but from recognising that your investment thesis was wrong, and that the stock is not doing as well as you expected. A trader is swift to book losses; he won’t let his capital erode. An investor has to deliberately take the steps to sell what is not working. Many cannot let go and live in false hope. Too many invest when a stock is falling in value, putting good money to chase the bad. Too much has been lost in equity investing by those who refuse to own up to their mistakes.
A diversified portfolio of stocks, selected for their potential, but replaced when they fail, will deliver the growth you are seeking. Investing in an equity mutual fund is an efficient way to invest in equity. Investing in an index ETF is both efficient and cheap. Investing by yourself is thrilling, but fraught with mistakes as you climb the learning curve. Choose your pick, but do choose equity.
The wealthiest people in the world today are equity investors. Don’t get left behind because you don’t understand how a business should be run. Someone else has figured it and equity investing offers you a fair, democratic, and efficient opportunity to take part in that success. Don’t wait for names. Spend your energy on putting down your process for participation.