Long Term Stock Market Investments: Do’s and Don’ts
Follow the business not the stock price.
When you invest in a stock for long term, you are owning a business. Many of the retail investors conveniently ignore this primary foundational concept of stock market investments and fall into the trap of quick money making or trading. They keep watching the price movements of the stock on a daily basis and feel tensed when it goes down and feel overwhelming happiness when it rises. What we as a retail investor need to understand is that daily movement of the stock price, most of the time is driven by sentiments and not by business fundamentals of the company. When we understand this reality, we will start following the business rather than dancing along with daily movement of stock price.
Evaluating the future growth prospects:
Long term value of the stock is derived from how much profit it is going to generate in the future.
This will depend upon a number of factors such as in which industry the company operates, competitions, management’s ability to drive the business, the ability to capture market share etc.
In other words, current price of a stock is a representation of how well market has understood its future growth potential.
Some of the stocks will not command a high valuation despite their good performance, and it may be because markets are not convinced about their future growth prospects.
Annual Reports, Financial Reports, Cooked Books, Market research reports from authentic sources:
The only way to understand completely about a particular business is to understand the in detail about the industry it operates. Understand dynamics of the industry. How various geopolitical events affect the industry. It is highly important to understand if the financials of the company are made up and fraudulent. We may need to look through the books with an eye of forensic accountant for this.
Understand the major players in that industry:
Try to analyze the intensity of the competition in the industry and how well the company can overcome this. You may need to follow the company for multiple quarters to understand the competitive advantage of the company.
Understand the company’s annual reports and financial reports:
Read through the management guidance’s and understand how the management is delivering their promises.
Patience:
Many a times despite the good performance of the business, stock price may not rise. These are difficult times. The whole world will tell you to act against your conviction. Hold on to your conviction.
Stock market investment is not a bank fixed deposit, but it’s like building a company of your own. In the beginning no one believes you. Patience is the most important skill along with your conviction to be in the game.
Happy Investing.
