The investing arena is loaded with uncertainties and noise.We often invest on impulse, under the influence of the information overload that surrounds us. But what if we had a checklist that can safeguard us from our impulsive ventures? While I wouldn’t recommend you to completely rely on a checklist, because investing arena is too dynamic, but this Special lists some of the very few thumb rules that can help simplify you begin your journey towards becoming a Super Investor
● Keep a Margin of Safety
Overpaying is the single biggest mistake that you can make Even the greatest car, the greatest beach house is a bad buy if you overpay for it. So it’s important to not just know the true & fair value of the asset you are about to buy, but also to ensure that you keep a scope for your estimates turning out to be wrong. After all, If you want to build a bridge through which Vehicles weighing 10 tons will pass, wouldn’t you keep a margin of safety and build a bridge that can tolerate up to 12 tons of load ?
● Circle of Competence
Do you buy a book written in a foreign language you don’t understand? Do you try to swim in the river without learning to swim in the pool? We avoid doing things we don’t know, but when it comes to investing, we buy anything and everything that is “advised” to us. It’s important to buy the business you understand, only then you will be able to accurately forecast. Imagine a scenario wherein a team has scored 200 runs at the loss of 3 wickets after 40 overs. What will be your prediction of the the final score after 50 overs ? Those of you who regularly watch cricket will say that probably the team will end up scoring between 280-300 runs. How did you arrive at that ? Through your past experience & knowledge. Similarly you will be in a better position to forecast the business growth of the business you understand. So stick to your circle of competence.
● Buy Great Companies
Do you eat at Roadside food stall simply because it’s cheap and tasty ? No, because we are smart enough to know that although it saves money in the short run and tastes great, but its long term effects on our health are adverse. Similarly a cheaply priced stock of a not so good company might look lucrative in the short run, but it’s quality that matters in the long run. So if you wish to preserve your (financial) health, stick to good companies.
● Law of the Farm
As in farming, success needs time and effort. Some things just naturally take time, you cannot speed up the process. It takes 9 months for a baby to come to life. Similarly, creating wealth in the stock market takes time, if you try to speed up the process, you will lose what you have today. So patience has no substitute.
So the risk you take, should be aligned with the risk you can afford to take. If you bet everything on a risky “Concept stock” make sure that you are prepared to face the downside of it as well.So all my avid readers,stay tuned for such more protips to build yourself as a smart Investor.