For the First Time Investor in Equities

This was the Q & A with ET- What is quoted is as per his convenience!

Dear Mr Balakrishnan,

I am an Assistant Editor with ET Wealth (part of ET group), a personal finance newspaper that appears on Mondays. I am based in Delhi. We had earlier exchanged emails when I was doing a story on the malpractices of brokers. I am now working on a do's and don'ts story for first-time stock investors.

 The story

With the markets in a buoyant mood; the euphoria surrounding the formation of a stable government at the centre; the FM coming out with a reasonably reformist Budget; the economy on the cusp of a turnaround; and so on, many first-time investors are currently entering the markets. Some are not taking the mutual fund route but venturing directly into stocks. This story is aimed at them. It will advise that they should first prepare and then invest. It will also advise them against committing some of the common errors that novices tend to do. I have listed a few points. I shall be grateful if you would give me your views on some of them, and add some of your own.

The first time investor always comes at a time when prospective returns from investment are near their lowest. However, I do not believe in timing the markets. The key is to buy a stock at a reasonable value. The first time investor has to come with a clear goal in his mind about his duration, his patience and temperament. Investment is about attitude. Greed or the need for speed are the worst enemies in investing.

At the outset, come in with money that you can afford to lose or will not miss if lost in its entirety. Investing in stocks is a route to wealth creation and not a route to attaining specific goals in a definite time frame. The markets may not cooperate with you when you need the exit.

Of course, many will get lucky with their first punt- make quick money, sell out. Then buy something which keeps sinking and becomes a very long term investment.

The story will be written favouring a long-term, buy-and-hold approach.

1. What should you do by way of preparation before you decide to invest in stocks?

 Understand and realise that you are buying a business. So understand what you are buying. Spend more time in buying stocks than you do spend on buying a shirt or a mobile phone. Learn some basic financials if possible. If you do not invest time in education, then direct investment is not for you. One nice way to start off ANY TIME is to choose some four or five companies you understand or think will last twenty plus years and have a history of over twenty years. Sell something that you understand and which people will need increasingly- This will direct you to companies like HUL, Nestle, Colgate, Glaxo, ITC, HDFC, Gillette etc.

Do a SIP in these stocks for five to ten years.

Or if you can spend time, then take one or more of the following

a. Join an investment club.- discuss, ASK, invite specialists, experts, company executives etc to talk to the group

b. Join a short-term course on stock investing. (not much use- )

c. Read a few classics on stock investing.  (Absolute must- Also on business analysis- for instance, a MUST is to read Competitive Strategy by Michael Porter)

d. Invest in a database (expensive proposition for individuals, but possible for groups). (nos become less important on a daily basis)

e. Read reports from brokerage houses.  (AVOID AT ALL COSTS) do your own homework-

 f- DO NOT WATCH ANY BUSINESS CHANNEL

2. Points to remember when investing

a. Pay attention to company fundamentals.

b. Don't ignore valuations.

c. Have a long-term investment horizon.

d. Know when to exit.

e.  Work out price points where you are happy to buy- Wait for the prices-

3. What are some of the things you should definitely not do when you are still a novice in the stock markets? Some of the common errors that first-timers commit.

a. Avoid IPOs.

b. Avoid F&O trading.

c. Avoid buying and selling on tips.  

d. Don't engage in day trading. 

e.  AVOID margin trading-

f- buy small cap or mid cap companies which you do not understand

g- DO Not buy stocks of companies whose business you cannot understand

h- Find out about the owners, auditors and ask around

i-                    Use google- websites like www.watchoutinvestors.com ; SEBI website etc for bad news on promoters

i)                    DO NOT BUY WHERE PROMOTER HOLDING IS LESS THAN 30%, OR HE HAS PLEDGED HIS SHARES

ii)