The Russia-Ukraine saga, sharp jump in crude oil prices, elevated inflation and a sustained capital outflow by foreign investors have kept the Indian market jittery of late.
Many investors have been wondering how to trade in such a market with so much uncertainty. New investors may find it more difficult to navigate in such a market and a sharp drop in equity prices during their early days of investments may discourage them from future investments in equities.
Markets never move in one direction for a very long time. Rise and fall are part of investing. There are a few points that new investors can keep in mind to get success in stock investing. Let me mention five key points that you must remember while investing:
1. Never start with a huge investment in direct equities unless you are a thorough professional in the equity business. If you are a beginner in equities in terms of knowledge, start with a small investment, which if you lose entirely also your financial conditions will remain steady and stable.
2. Never use borrowed money for equity investments – it should always be part of your savings or surplus money. Equity markets are often known for bearish phases lasting even two to three years. If you lose just 10 percent of your capital after two years of the bearish phase, just for an example, your total loss could be 30 percent of your initial capital including the interest costs. Such acts would destabilize your financial conditions if you happen to be hit by a bearish phase.
3. If you are starting with direct equity, then evaluate:
(a) Quality of promoters of the companies. Prefer the stocks, which are listed on the markets as they would give ample scope to analyze the track record of business performance and promises given vis-à-vis the achievements of the management.
(b) Strength of the balance sheets. Select those companies, which have very low debt-equity ratios, if not cash-rich companies. Ensure that those companies do not face any working capital crisis – their inventories and receivables put together should be normally around one-third of their annual sales.
(c) Understand stock valuations. Look at the valuation ratios like price-to-earnings ratio (PE), price to adjusted book values, or enterprise value to EBITDA of the stocks selected. Ensure that they are around the industry averages unless the companies selected are the leaders in their respective industries.
(d) Frequency and objective of name changes. Be cautious of companies, especially from the small cap segment, which keeps changing their names frequently in every bull market. In such cases, look at the trend in their stock prices over a 10 to 15-year period – if they had destroyed equity wealth to the extent of over 50 percent after the burst of every bull run, then don’t invest in such companies.
(e) Objectives of free service providers. In all commercial services, professionals do not generally reach out voluntarily to provide free services to the end-users. So, if you are aggressively approached with free stock advice, then evaluate their objectives and also their stock recommendations on the basis of the above points (a) to (d) before investing in them.
4. If you cannot evaluate points (a) to (e), then invest in stocks on the basis of trusted investment advisers. If you cannot evaluate a stock and also cannot get access to trusted investment advisers, then invest only through reputed mutual funds.
5. Remember that the stock markets have enabled a lot of people to create huge wealth even for generations. However, the same markets have also destroyed the wealth of many families. The investors, who focused more on the quality of stocks than on the objective of making quick money and waited for the long-term, are the ones who made enormous wealth from the equity markets. Many first-time investors, who developed enormous anxiety and hence, ignored the quality of stocks, rushed to make quick money and even averaged on downcycles without getting the grip of the fundamentals of the stocks are the ones who lost enormous wealth in their families.
Never blame the markets if you fail to evaluate the quality of the stocks. Equity markets are invisible and intangible – it only throws back the consequences of cumulative actions of smart and gullible investors. So, if you are a first-time investor, first decide on which side you want to stand.
(The writer is Founder, Equinomics Research & Advisory Pvt Ltd)