Investing in the stock market is for everyone. If you have a IQ of 25 and have your common sense in place, you are pity much equipped to invest in the stock market. But you should have a high EQ.
Everyone knows that investing in stock is risky, but statistically climbing downstairs is riskier. So it all boils down to your risk appetite. Risk comes in not knowing what you are doing. Risk is defined as a probability of happening a negative outcome and not able to deal with the outcome.
So rather than investing, we should do value investing. Value investing means you are not looking to buy a stock but you are looking to buy a business. So you will only invest in that business which has a future potential of growth. This one perspective will take you miles in your investment journey. Again it is very easy to ride a bull market wave and select a good business but real profit is generated when you can identify good business in a bear market. This viewpoint is very positively correlated with the golden rule of investing “ Buy low and Sell high”. The Following grid can explain value investing in more detail:
|Scenario||Your View||Market View||Company Fundamentals||Gain or Loss|
It is the most common bull trap of market in which most of the retail investors get trap. You think the stock is doing very well and market also shows that presently the stock is doing excellent but you do not do your research and follow other’s suggestions. But actually the company is not doing well in its core and in the long run, it will make you a loser. Yes Bank is a classic example of this situation.
In this case, you are a good investor and you do your research. But you are very arrogant and way too much proud on your research and blindly follow it without factoring in the future risks in your report. You think you can beat the market and make a huge gain. But unfortunately, you lose because the business you were betting on was on a decline phase of its PLC curve or you did not factor in future risks and events. May it be any case, in the end you are a loser.
This is the most favourable case. In this your research is correct. You do your fundamental and technical analysis very deeply and get your numbers correct. This is kind of deep research is done by experienced and seasoned professionals who have great self-discipline. So this case is achieved with more and more practice and knowledge. Currently, in this pandemic panic, most of the retail investors are panic selling due to short term losses, but value investors are actually buying a great business at wonderful prices and will make long term gains.
Hope you get a gist of value investing and I will give a thought to end the article.
“Stock market is a device for transferring money from the impatient to the patient” – By Warren Buffet