Every long term investor needs to know these three things.
First step in long term investing is to take a portfolio view of your stock investment
If you are a long term investor, the first thing you need to remember is that you don't make money on individual stocks, it is about making money on a portfolio of stocks.
You might have bought the stock when its price was very low say Rs 50 and it is now Rs 5000, you feel elated and fantastic at your stock selection skills.
One question to ask is - How much money did you invest in that stock? - was it Rs 10000, or about a lakh?
And ask how much difference did it make to your wealth?
This is because you are managing an entire set of stocks where some of them are making money and others are not.
Find out what is working, what is not and what do you want to do about it
Knowing cycles is the second important step to become a long term investor.
The next thing is when you are building a portfolio especially for a longer term, and that has good quality stocks in it, you must understand that there are many over arching external macro-economic factors that you will be dealing with.
When there is optimism, you can feel it everywhere. The environment will be shouting out one thing, everything is going to be great. It will look like every business big or small will succeed, everyone is making plans for the future with a lot of optimism, businesses are expanding, borrowing more, consumer sentiments is improving, and they are sharing projections for a bigger better world which gets reflected in the stock prices too.
How will you differentiate which one of these businesses will succeed in future to make you a millionaire?
Its not easy to answer that question.
It becomes even harder when things begin to collapse in its own weight as we all know that every business that is set up will not become successful. For every successful business, there are many others that are not doing well.
And it becomes obvious when of all the optimists, only a few of them can take the market falls and the bear phases of the stock market.
To become a long term investor, you have to be present in the market for atleast one cycle - when things are going bad and get better again. Only we don't know how long this will last.
So, a long term investor has the courage to buy stocks when the markets are down and hold yourself back when there is too much optimism to book profits and exit.
Time in the market is more important than Timing the market
Key thing over here is to understand how to behave in the crowd
The next step is realizing that you are not alone here. You are always in a group and influenced (most of the time unconsciously) by what others are doing and making decision constantly that are biased.
You are constantly comparing and doubting your narrative as you think that the crowd knows something you may not know. The group you are part of has different kinds of investors, some of them are informed investors, speculators, and there are also people who are selling the stock not because they have a view but they want the money now.
And you have no way of finding out their motivations to buy and sell stocks.
How am I going to manage my money in the context where different people behave differently. This definitely calls for a lot of work on your own emotional intelligence.
So, now that we know about some of the key building blocks of a long term investor, what do we do now?
If you want to invest for the long term, but don't have time, there are options available in the market that will help you build a portfolio.
These are managed portfolios - also called Passive investing.
For example, BSE Sensex consists of 30 top companies in the market. These companies are the largest, biggest, most profitable, well-traded and this index is available to you as a product in the form of Exchange Traded Funds (ETF) or Index Funds (Mutual Funds).
You can simply buy the index.
How will this help?
When the index was initially constructed there were companies that do not exist today. And why is this so? This is because, the index is a dynamic portfolio that throws out companies that are not doing well and brings in others that are doing well, based on their market capitalization.
The next best choice is to ask the fund manager to do it where you buy an equity fund which is an actively managed fund.
A fund manager constructs a portfolio and he looks at stocks, business cycles, investment strategy and assures you that she will perform better than the index. The fund performance is driven by the fund managers' stock picking abilities, his research, monitoring, managing and deploying the funds into businesses that are growing and performing well.
A fund manager requires a fee to do this for you. If you are willing to spend some time selecting a fund that is consistently performing better than the index and its peers and pay some fee, you will be able to invest in Mutual Funds.
There are portfolio managers who are skilled in creating these portfolios for you and managing them for a fee. A few years back, this facility was available only if you have more than INR 25-50 lakh to invest and it is called PMS (Portfolio Management Services). The Portfolio manager charges a percentage on the Return you earn on your investment.
Smallcase is an alternative of PMS that is offered to small retail investors even if they do not have so much money to invest.
There are investment advisors and portfolio managers who create portfolios that you can invest in where the minimum investment is much lower.
Some of them charge an upfront fee to give you access to their portfolios while others offer it for free as well.
As a long term investor, you have many options in the form of ETFs/ index funds, actively managed mutual funds, smallcases, PMS and so on. You can make a choice or invest in any combination that works for you.
Its easy to participate in the equity market if you made it simple.
How do you invest in equity markets as a long term investor?
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