Where to invest money for good returns?
The most consistent answer of this question is equity.
But just by investing in equity, one can earn good returns? No.
So what must be done? How to invest money for good returns in equity?
It will be not wrong to comment that equity investment is all about knowledge & patience.
Equity investing is easy, this is why so many people buy/sell stocks each day.
But out of all traders, how many actually earns good returns consistently?
A very tiny minority. Why it is so?
To generate good returns from equity investment, one needs to understand equity very well.
Good understanding of equity will come by knowing what factors affects stock price.
Why stock price go up and why it falls.
Predicting stocks behaviour becomes much easier if one can establish this relationship.
Stocks price behaves very unpredictably.
It’s needless to spend time figuring out stock price movements in short term.
But in long term, price of good stocks becomes very predictable.
What factors drive stock prices in long term?
The answer is, their strong or weak business fundamentals.
In order to invest money for good returns, fundamental analysis must be done.
If one can establish relationship between price and fundamentals of business, good returns can be ensured.
The correlation between business fundamentals and market price of stocks only becomes identifiable in long term.
In short term, price movement is rather erratic.
So one thing is clear, equity investing is not for short term gains.
One must invest in equity with holding time of at least 3+ years.
But is it sufficient to buy any stock and hold it for long term?
This way good returns can be ensured?
Well, it this would have been so easy, everyone would have been making money in stock market.
Surely, the the trick is something different.
Lets understand the real tricks to invest money for good returns.
(1) Avoid Playing Blind with Stocks
Stock prices are also influenced by external economic factors.
Changes in Europe and America can effect Indian stock market.
In order invest money for good returns from equity, close monitoring of overseas & domestic economics is essential.
This is why, an informed investor in equity can generate better returns than a non-informed investor.
In addition to economics, sound knowledge stock analysis is also essential.
People must develop a knack for reading and comprehending company’s financial statement.
Observing performance of individual sectors also helps while investing for good returns.
No matter how strong is the Automobile Manufacturing Company, but if auto sales are falling in country, income is bound to fall.
So being aware of individual sector-trends helps to time the market.
Many investors buy stocks without stock analysis and sector analysis.
Inculcating a habit of investing in stocks by being aware of interrelated factors is important.
(2) Buy Stocks for Long Term
People often treat stock investment as a tool for short term gains.
For such people equity investment is simply buying low and selling high.
If target is to invest money for good returns, then stock must be bought and held for long term.
Stocks price may fluctuate erratically in short term.
But in long term a clear TREND is visible.
In short term, returns from stocks is unpredictable.
But in long term, good stocks can give good returns.
The best investment-horizon for stocks is 5-7 years or more.
Buy best stocks now and leave it untouched for next decade.
People often panic when price of stocks falls.
This results in short term selling.
But instead of panicking people must control nerves.
Selling when prices are falling is the worst thing one can do in equity investment.
(3) Invest in Fundamentally Strong Stocks
We talk about good stocks, but what are good stocks?
Good stocks are one which has strong fundamentals.
Investors shall avoid stocks with weak fundamentals under all conditions.
Trick is to do the fundamental analysis of stocks before buying them.
Stock price will move up in long term only if its underlying business has strong fundamentals.
Stocks which has weaker fundamentals, its price growth will not be as certain.
But why stocks with strong fundamentals are investor friendly?
The answer is simple, a company which has a strong top line and bottom line, is surely going to make more money for its investors.
Now here lies the trick, what means by strong fundamentals?
A company which is making large profits is fundamentally strong? No, this is not as simple.
One must see several parameters to judge if a stock has strong fundamentals or not.
This is where my stock analysis worksheet will prove helpful for my readers.
(4) Low Price does not mean Better Value
People often ask me to suggest good penny stocks. Whey people are fascinated with penny stocks?
People often get fascinated with companies whose stock price trades to very low levels.
Low price does not mean that stock is available at right price.
It is important to do value analysis of stocks before buying one.
Value analysis is essential before buying any stocks.
It can happen that a stock which is trading at $100/share is a better buy than a stock which is trading at only $1/share.
In order to come at such conclusion, one must know the intrinsic value of stocks.
I have done value analysis for few top Indian stocks to give you a rough idea about what must be known before buying any stock.
In order to invest money for good returns, people must buy fundamentally strong stocks at undervalued price levels.
Remember, low market price does not guarantee that the stock is cheap.
The stock can be called cheap only when its market price is less than its intrinsic value.
(5) Do not Put all Eggs in One Basket-Diversify
No matter how well one selects the stocks, but it is not advisable to put all eggs in one basket.
Investing only in one company (or only in stocks) is not advisable.
If you are Warren Buffett you can take such a risk.
But we know, we are not Warren Buffett.
For common man, it is good to spread ones investment between equity, debt, real estate, gold, cash etc.
Even in equity, it is advisable to balance the portfolio.
Buying stocks of non-related sector is advisable.
One easy example can be pharmaceutical stocks and auto stocks.
These two stocks represent completely non-related sectors.
One must limit the exposure to equity.
If you are 30 years of age, do the following:
- Invest 70% (100 minus your Age) in equity.
- Balance 30% in:
- Debt (bank deposits),
- Real estate (REIT),
- Gold (gold etf) and,
- Cash (savings in bank).
Diversification averages out the total returns.
But on positive side, it also minimises the risk loss.
(6) Buying Stocks when Price Dips
This is one of the easiest way to generate good returns from equity.
People generally panic when their stock price falls below the purchased price.
In panic, people sell their holdings. But this is not correct.
Instead of selling, one must buy more stocks during price dips. Confused?
OK, lets go step by step!
Identify good business which has strong fundamentals.
Calculate intrinsic value of these business (fair price per share).
Buy stocks of these good businesses when its market price falls below intrinsic value.
Generally market price of good stocks trade at price levels higher than its intrinsic value.
So what is the most likely time to see market price of these stocks below its intrinsic value?
During the price dips.
This is why, for value investors, moments like stock market crash are not the times to panic, they relish those times.
In those moments of market crash, they are able to buy even best of stocks at undervalued price levels.