Few places in India carry as much mythology as Dalal Street. Stories of fortunes made and lost have inspired generations, and today a new wave of retail participants is stepping in through smartphones. Many of them begin by searching phrases like indexdb dax while trying to understand how index data is organised. By mid-morning, they are often checking the BSE Sensex today to gauge whether the mood is optimistic or nervous. Enthusiasm is welcome, but enthusiasm alone does not produce consistent results. What works over years is a disciplined routine, built on rules that you create when you are calm and follow when you are not.
Define Your Purpose Before You Place an Order
The first question any participant should answer is why he/she is in the market at all. A person saving for the daughter’s wedding in 10 years has very different requirements from a retiree looking to supplement his income, and both are different from an active trader seeking short-term opportunities. The purpose dictates time horizon, and the time horizon points to the instruments that make sense.
Write your goals out in simple language with a rupee figure and a date attached to it and work backwards to find out how much you need to invest regularly. It gives you a concrete measure, and protects you from getting seduced by someone else’s methods.
Position Sizing and the Art of Staying Alive
Many seasoned market participants often say the first job is to not risk too much on one idea so you survive. A common rule of thumb is not to keep more than a certain percentage (say 25 per cent) of your total investable amount in one stock, so you stay invested even if one particular stock tanks.
Another critical point for active traders is to use a stop-loss price. It’s painful to cut losses on a scrip and walk away with nothing, but it’s an important discipline to prevent larger losses. Avoid putting your life savings on the line by borrowing money, and be particularly cautious about using leverage, as it amplifies losses as much as profits. Regulators have often pointed out that a very large number of retail investors in derivatives end up losing money. Think long and hard before taking up any such product.
The Psychology Behind Every Decision
Markets are as much about emotions as they are about math. The age-old problem of greed and fear continue to plague investors as much today as they did 30 years ago. The good news is it’s human nature to be tempted towards buying scrips that have already risen sharply after hearing upbeat news, or to sell scrips that have plummeted on some negative news. But knowing your own psychology is a big step towards controlling it.
One way to fight impulsive decisions is to have a mandatory waiting period for non-critical decisions. So if a colleague tells you about a hot tip, give it 48 hours before you start researching the company. It could be that the excitement will fade away by then, but it could also be that you will realise that you had no reason to jump in the first place. By then you would have also done enough research on the balance sheet and profitability, and looked at risks like leverage before making a decision. Similarly, cut your losses and walk away when a stock falls; don’t immediately go for a bigger loss to “recover” the lost money. Revenge trading is a big temptation for retail investors after a loss.
Don’t fall for hype and unsubstantiated claims of sure-shot gains, as no one can predict equity markets. Unregistered advisers operating without the knowledge of SEBI can be dangerous. So check the adviser’s credentials with SEBI before you get swayed by their claims.
Review, Learn and Refine
A good routine has to be constantly reviewed, refined and tweaked. At the end of every month, go through your trades and think through what went right and what went wrong. It’s crucial to separate reasons behind results – was it a good decision that turned bad due to some external factors or bad decision that turned out to be good on hindsight. Both are important exercises that help you refine your approach.
But don’t forget to check expenses. Brokerage, taxes, and expense ratios of mutual funds quietly cut into your returns. Know the difference between short- and long-term capital gains, and don’t pay more tax if you can hold on to a winning stock for some more time.
Patience as a Competitive Advantage
Impatience is the biggest liability in investing. Some of the biggest names in Indian investing were able to make a fortune because of their patience. They picked fundamentally strong companies and held on to them for long periods of time. It’s important to remember that the power of compounding makes your money work for you. Even a small amount of regular savings can grow to be a big corpus if given sufficient time.
That said, patience doesn’t mean blind faith. So if the company faces problems like consistent losses, poor governance or loses its competitive edge altogether, it’s important to sell it. In other words, understand the difference between a falling stock price and a falling stock.
Wrapping Up
Making a sensible investment routine on Dalal Street requires a clear focus on goals, discipline around position sizing, understanding emotions and patience to let things work out. All of it sounds pretty straight, but nothing of substance is achieved without discipline and hard work. Remember that any investment always carries risk, and it’s best to consult a SEBI-registered adviser before making any investment decisions. Make your rules, follow them, and let time take care of the rest.
