27 March 2017

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How to Become a Smart Investor

successful investing ideas  by www.familyfinance.in
Every investor have a dream to become an investor like Warren Buffet. right? It may not possible but keeping some vital information and knowledge in mind, you can become a better and smart investor. There are several guides meant for young and beginner investors teaching hot to invest successfully. However, 85% of the investors entering to the stock market them self considering as investors but in truth they are just traders with a mindset to become rich in fortnight! Being a smart and successful investor do not required much effort but required some essential knowledge and commonsense.

Here are few points I would like to lay down in this post for those interested to know what all are the necessary skills and thought one required to shape himself or herself as a smart investor. These are adopted from the experience and common practices of legend investors like Warren Buffet, Benjamin Graham and Philip Fisher etc... 

1. Start investing early

Early investment ensures the capital growth to the maximum. It also helps investors to protect himself by giving enough time in front of them to earn money in case of suffering with any loses. For example, two people, one at the age of 20 and another at the age of 40 starts investing in stocks. They have put all their money to stock market with a focus of 20 years. Both of them planned to start their retirement life at the age of 60 years. After 20 years, unfortunately both have suffered severe damage and lost their invested money badly. At this time the first person have reached to the age of  40 and another to the age of 60. First person still have 20 years to retire and that much time he has to create wealth. What about the second person? He is already in the age of 60 and no time in front of him to make money now for retirement.

Here are some of the reasons why you start investing early:

1. You can take the huge benefit from the power of compounding interest
2. You will be able to take risks because time allows you for that.
3. Quality of your spending habits would dramatically improve.
4. Quality of your life would improve to a great extend.
5. You will be a step ahead from everyone on financial independence

2. Invest for long term

You may have heard short selling, day trading kind of terms. These are meant to traders who buy stocks today and sell same day or next day. You cannot no way consider them as investors but they are traders or in other word, gamblers. Long term investment meant to take the advantage of computing and that would make the investors wealth by slowly but steady. Why Buffet still hold the shares of Coca Cola and American express that he purchased in 1960s and 70's? Have you realized how he got wealth by holding such quality stocks for long term? In another example, those who are holding the stocks of Birkshire Hathaway or HDFC is super rich now. How? This is the power of compounding. Invest in quality stocks and other instruments, monitor the business and hold for ever.

Remember, I am not trying to say holding anything or long term would make the investor rich. It is a myth. It can also make the investor poor. You must hold the 'Quality' stocks and instruments and needs to be monitored time to time and make necessary changes whenever required. 

Here are some major advantages of investing long term:

1. Power of compounding again a key benefit
2. Long term view lower the risks
3. You will get benefited from tax free advantages such as dividends, tax free gains etc..
4. Investments held for longer periods tend to exhibit lower volatility than held for shorter periods.
5. Long term investments save you other expenses such as transaction costs etc..
6. Long term investment are the best option for long term goals like retirements

As Warren Buffet said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

Here is a short video, Buffet saying how long term investment make you rich.


3. Diversify your investments smartly

"Do not put all your eggs to single basket". Remember this word. As an investor, you should have well defined, attainable goals and the investments should be done in that way. Suppose you have a goal of building a house after 10 years and you have added money to a bank FD for 10 years, you are not only going to achieve your goal but also not going to get the money grown. 

In this scenario you should check with other possible options and investment mixes such as stocks and mutual funds. Taking advise of a good investment adviser or financial planner help you to solve this issue. 

Diversification not only help you to attain goals but also help you by effectively protect your invested money from a single point erosion. 

4. Best investments can be done only by you

Yes that is the truth. You may find lots of stock recommendations everywhere, but ultimately your own pick would win over all of them. Have necessary knowledge on what you want to be and what you are doing to get that. If you like to invest in stock market, learn about that before committing directly to the stock investing. Learn from success and failures. Here is a list of major mistakes people commits in stock market frequently and resulting total erosion of their wealth. Read this first.

Have your own investing framework to follow. For an example, here is my personal investment framework. I am strictly following this to make investment decisions and investments and it is giving me continuous success from each of my investing activity that is doing from years.

5. Beware of tipsters, analysts, brokers and self acting gurus

It is your money and the the responsibly you show to invest your money cannot be expected from anyone else.  Never rely on hot stock pick news’s, stock tips, analyst reports or any such rumors that may recommend anything to investors to buy. There should be certain interest behind each of this. It is there work and for this they are paying for. So let them come to you but it is your duty to analyze such tips and recommendations and avoid it. Instead do your investments only after doing necessary researches and homework. There are lots of people failed with their money by chasing such tipsters and hot news. 

However, if you carefully deal with tips, you will sometime get some very good investing opportunity. However it is meant for prudent investors only.

6. Don't follow uncle Sam or imitate others

Remember, everyone have different style, goals and thoughts on actions. Never follow anyone and try to adapt his investment style. Take the best qualities of such people and create your own investment frameworks. Imitations may look like gold but it cannot be the real gold.

7. Don't be greedy

Greed have trashed lots of people in the stock market. Investing is not a process to make money in a day or month. It required patience, knowledge and prudence. Most of the people I met have  found entering to the stock market to make money in a day or week. I generally advices them take lottery than investing on stocks. Such intentions lead them to do stock trading or intra-day trading and finally return with empty hands.

8. Learn necessary qualities from successful investors

Investors must spend enough time to attain necessary qualities from successful investors. At the very beginning as an investor, one should learn most required qualities to become a successful investor. Patience, courage and commonsense are the most found qualities to a successful investor. A good investor never become panic or monitors his investments in each and every moment. It is because he will ensure the quality of investments before it made. Requirements of having and following a personal intellectual framework is must for those who are willing to become successful investor.

9. Never marry to stocks

Remember this golden advice always. Very less investors follow this rule to save them from collapse. It is because, most of them blindly believe that long term holding of any investment would finally make them worthy.  Will it? no way. This is totally depends on the quality of investments and time to time monitoring of its performance. For example, holding a low quality stock for long time never make you wealthy but may send you later with empty hands.  It is very important to understand when to sell stocks as when to buy them. A good investor first lean when to sell stocks than when to buy stocks. 

This video would give a comprehensive information on when to sell stock and that is what legand investor Warren Buffet was doing.


10. Asset allocation models

Build your own asset allocation models. Divide capital to various investments like stocks, mutual funds, ETF's, Gold, Arts, Real Estates, Money Markets, Debt Funds, Fixed deposits etc. Mixing of  right investment based on your various goals would not only help you to achieve the goals but give a good diversified portfolio and exposure to various investment products.

11. Read, hear and watch

Reading good material would enhance your knowledge. Subscribe to good periodicals on investments, read the biographies and success stories of great investors, hear the interviews, watch the videos of them. This would give you with better ideas on the required steps to successfully invest your money to stocks. I have a list of worldwide accepted Wiley Investment Classics collection for investors to read and even build a personal library.  Have a look.

Here is a list of severe investment mistakes beginners generally makes 

1. No plan and goals
2. Too short investment span
3. Too much attention to tips and media
4. No monitoring of investments
5. No re-balancing of portfolio
6. Over monitoring
7. Fear on volatility
8. Frequent trading activity
9. Buying micro caps
10. Selling good stock when market down