Golden rules of Investor and Traders in the Indian Stock Market is for anyone who is looking to gain knowledge for stock trading and investing. Any time you lack the clarity in the stock market and if you are stuck with piled up losses then you can read this. It covers all the most important points that you’ll ever require trading in the stock market.
Whomever I have shared this with have put this to use.
I was overwhelmed when one of the readers with 20 years of experience in trading and investing read this and gave a very positive feedback on the points covered.
I am sure you going to put this to use and your feedback would be much appreciated.
- 1 Golden Rules for Trading & Investing in Indian Stock Market
- 1.1 Pareto Rule
- 1.2 [E]veryone Want to Go to Heaven, But Noone Wants to Die
- 1.3 Average Strategy Versus Superior Strategy
- 1.4 Price Versus Value
- 1.5 Compounding
- 1.6 Activity Versus Inactivity
- 1.7 Predicting the Stock Market
- 1.8 Efficient Market
- 1.9 Holding Period
- 1.10 Keep Investing a Little More
- 1.11 Inflation
- 1.12 Bear Market
- 1.13 Constant Overlooking
- 1.14 Over To You
Golden Rules for Trading & Investing in Indian Stock Market
The points are mentioned here are in form of bullet points and from what I have learned from the readers as well as personal experience that every time I read these I get to learn something new.
Some of the points mentioned below are very direct and to the point. There are certain points which cannot be read casually to understand. Reading patiently would be suggested in those points. You can always comment below if you have any clarifications.
Points mentioned below are key to your apt Risk Management and Money Management.
Let’s list down the points below:
“Italian economist Vilfredo Pareto developed the 80/20 principle after observing that 20% of the peapods in his garden produced 80% of the peas. He then later published a paper while at the University of Lausanne that showed that 80% of the land in Italy was owned by just 20% of the people”
In the stock market, the 20% of your stock will give you 80% of the return. If you are into trading then 20% of your trades will give your 80% of the return.
If you are looking at narrowing on the only 20% of the trades then it is difficult to pinpoint exactly those trades. Hence as a trader and investor, you would have to go through the entire process.
The rule is proven is all the tasks, business, finance, work and the stock market. One of the most important aspect of golden rules for trading and investing.
Even if you see some of the top investors in the world, for example, Warren Buffet you would realize that majority of the income has come from very few stocks.
Similarly, the Indian Stalwart Investor Rakesh Jhunjhunwala portfolio speaks similarly.
This is not something new.
If you still have not managed to understand, then there is another simple diagram for your better understanding. If you look at the below image the 20% efforts mentioned in red on the left side gives a return of 80% mentioned on the right side. Likewise, the effort of 80% in blue on the left side gives a return of 20% on the right side.
[E]veryone Want to Go to Heaven, But Noone Wants to Die
Why not all the investors and trader get rich in the stock market?
Or even majority of traders do not make money in the stock market?
Why does the stock market reward the one with patience from the one with greed?
The answer is many years of Patience and Discipline. One has to go through the process to achieve the goal.
Those who treat stock market as quick money-making machine are tested time in and time out. This has stood the test of time and successful are only those who have developed the patience and discipline in the stock market.
Golden rules of investing and trading would have been incompete without this
Average Strategy Versus Superior Strategy
Everyone in the stock market starts out by looking for a holy grail of trading strategy. The fight is always between average strategy and superior strategy.
In the entire process of looking for the superior strategy, we always feel that our strategy is average.
This is when the Emotion takes over our trading and investing activities.
The key to success here is even an average trading or investing strategy followed for a long period of time will give you much more returns compared to good strategy changing very frequently.
Most of the traders are victimized thinking that the strategy that they are following is below average. This results in strategy changing very frequently and not getting best of any strategy.
Price Versus Value
“Price is what you pay. Value is what you get.” – Warren Buffett
There is a continuous tussle between the price that you are paying and the value that you get. Price of the stock keeps changing very often based on the perceived value by the market participants. This is when the opportunity lies when the perceived value is more than the actual value the stock is trading at a premium price. Likewise when the perceived value is less than the actual value.
The opportunity in stock market arises when the perceived value is less than that of the actual value. There is a continuous change in the price of the stock. At times the market becomes too irrational and the price of the stock falls way below the actual value of the stock. It rightly quoted by Benjamin Graham about the movement in the price and value.
Benjamin Graham: ‘In the short run, a market is a voting machine but in the long run, it is a weighing machine.’, ‘The intelligent investor.
Compounding is rightly said as the eighth wonder of the world.
Compounding cannot be replaced by anything else. It works very well for a long period of time.
The formula is very simple to understand kindly find the formula below.
If your principal amount is constant the if you compare the difference between the simple interest and compound interest you would find the real advantage of compounding.
In the stock market only when the price of the stock is considered as the fact for calculating the additional income from the stock such as bonus, dividends & stock splits are added advantage.
The below is the example of how the compounding works. This is the reason that investors are suggested to start early in life.
Activity Versus Inactivity
The human tendency in the stock market is to be active to generate more returns in the stock market. A research conducted by CNN money concluded that 86% of the active fund managers underperformed.
SPDR S&P 500 ETF (SPY), recently became the second-most popular fund on the planet, leapfrogging nearly every single mutual fund. It’s outperformed 80% of active mutual funds over the past five years, according to State Street.
The reason behind the success of the Coffee Can Portfolio can be credited to inactiveness of the investor.
Passive Investing is taking the center stage across the globe. The returns that are achieved in the long term by passive investors are much higher than the returns achieved by the active traders.
Below is the infographic which explains the detailed difference between active and passive Investing in the stock market.
Passive and Active investing both have pros and cons. But the pro’s in passive investing far outweighs the pros of active investing.
Predicting the Stock Market
Investor or Trader every trade we make we predict the future price and the calculate the profitability. Only then do we enter the trade when a positive outcome is favorable.
On the other hand, stalwarts say don’t try to predict and control the stock market. Instead, control what is in your hands such as how much you can save, your investment process and your behavior.
Focus on what you can.
Emotion is the most important aspect when it comes to making money in the stock market. Below is the chart which explains how the emotions change over the course of price movement.
There are many things investors have told about emotions when it comes to investing and trading in the stock market.
“The efficient market hypothesis (EMH) is an investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.”
There is also a contrary opinion that investors are human and the time taken for the stock market the reflect all the information or misrepresentation of information could give some time for the market to be away from being fully effective.
The efficient market hypothesis refers to aggregated decisions of many market participants.
The market where all pertinent information is available to all participants at the same time, and where prices respond immediately to available information.
Markets usually run ahead or fall behind. Rarely in equilibrium. Over or undervaluation can last for a long time. Don’t time the market.
“My favorite holding period is forever” – Warren Buffet
Does it still stand true? One of the oldest mutual funds still has the lowest churning in their portfolio and has been outperforming the index with a huge margin.
Stock market participants are expecting quick buck. And the majority of the investors are losers in the stock market. Below is the chart of the average holding period in the stock market.
Buying and selling is easy. It is holding on through ups and downs is difficult but ultimately most rewarding.
Keep Investing a Little More
Two mantras of creating wealth in the stock market are, “Start Investing Early & Keep Investing a Little More”
If you understand the risk of not investing then you would start investing early in life. Likewise, if you understand how inflation can act on you then you would start investing a little more all the time.
Investing the same amount for a long period of time has caveats. You would have made a wonderful return in the stock market. But the entire value of your portfolio would not be enough to even lead a comfortable life.
The below video explain the necessity of investing regularly.
If you want to maintain the same standard of living throughout your life then you would have to tackle inflations.
Everyone talks about the risk of investing in stock market no one talks about the risk of not investing in stock market. The only possible asset that can beat inflation in the long term in Stock market.
Below is the Returns comparison of a different asset class.
People confuse themselves between being prepared for bear market and waiting for the bear market.
Investors in the name of being prepared for the stock market do not invest in the stock market itself. In this entire process, they miss some of the biggest bull markets.
The bull market is much longer than the bear markets. This is because negative news sells faster.
Regretting past bear market overseeing the bear market could result in knee-jerk at times. At the same time stop expecting, predicting, forecasting, foreseeing, anticipating, advance or even speculating a bearish market would only result in distorted decision making in the stock market.
Have you heard of anyone looking at the valuations of the property or house on daily basis? What would you think if you find one?
The same feeling and thinking come to stalwart investors when they look at us while we are looking at the stock market daily. Stock trading might require constant looking at the positions. Constant monitoring of position is usually done only one section of traders which is a day trader and positional trader.
This attitude only leads to creating unique situations for yourself. Which is best portrayed in the image below.
I have spoken to so many traders who only regrets to have lived a life similar the above.
Over To You
One of the most common complaints among the traders is that they have lost money in the stock market.
Your trading and investing activities should complement and supplement each other. If you are only trading without any investment portfolio then you are eventually taking high risk.
Not following the above golden rules would eventually lead to making a loss in the stock market.
Pro Tip: Change your attitude towards the stock market for knowledge rather than quick money.
Come back here and tell us about the before-and-after. I bet you’ll have something to say! If you enjoyed this post, I’d be very grateful if you’d help it spread by emailing it to a friend or sharing it on Twitter or Facebook. Thank you!