Monday, September 28, 2015

10 Tips For The Successful Long-Term Investor

Courtesy : Investopedia

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the losers and let the winners ride!
 
Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:


  • Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. 
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  • Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.
2. Don't chase a "hot tip".
 
Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.


3. Don't sweat the small stuff.
As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.

Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself

4. Don't overemphasize the P/E ratio.
Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
5. Resist the lure of penny stocks.
 
A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it. 


6. Pick a strategy and stick with it.
 
Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed


7. Focus on the future.
 
The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past. 

8. Adopt a long-term perspective.
 
Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. 

9. Be open-minded.
 
Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be concerned about taxes, but don't worry.
 
Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision 



Conclusion 
 
There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.




106 comments :

  1. Dear VP,
    Looking at the valuations Prabhat Dairy could get for its IPO, I see Umang Dairy is cheaply valued and could be a value-pick. Umang has good backing from 20000 Crore JK group, who are ready to pump in more money into dairy business. Kindly have a look at this stock and suggest your opinion. Thank you.

    ReplyDelete
    Replies
    1. I don't think Umang is comparable with Prabhat . Prabhat is a company with more than Rs.1000 Cr sales where the topline of Umang is around Rs.250 Cr only. Prabhat should be compared with Heritage and Hatsun , comparing these cos valuation is higher for Prabhat, but it is growing at good pace .

      Delete
    2. Is there a stock split by Amines & Plasticizers?

      Delete
  2. Valuable tips...! Thanks for sharing..!

    ReplyDelete
  3. Dear VP,

    How does one quantify the PE as low or high?. I read Peter Lynch's book which says that generally PE lower than 15 can indicate a value buy. Do such hypotheses hold for Indian equities?

    regards
    Amit

    ReplyDelete
    Replies
    1. In my opinion , a value buy never guarantee capital appreciation but it guarantee a cushion against fall. In Indian context , it is better to buy a stock with good growth potential at a price where is value in it . We must check the reason for higher and lower P/E and then take a decision based on that . A company with no growth prospects may available at a lower P/E , but no meaning in buying such a stock only because it is available at lower P/E.

      Delete
    2. Such a wonderful reply sirji, the lines "A value buy never guarantees capital appreciation but it guarantees a cushion against fall"
      Learning to become a Value Investor from you :)

      Delete
  4. Replies
    1. A contra buy for investors with enough patience.

      Delete
  5. I am tracking GMR Infra from Long and seen that promoters continues bought and increased stack upto 69.5%.

    What is your opinion? Please guide about fundamentals.
    Thanks in advance :)

    ReplyDelete
  6. what is your current opinion on zf steering gear.

    ReplyDelete
    Replies
    1. Expressed positive opinion around Rs.750 , It already appreciated 70% from there ,neutral at CMP.

      Delete
  7. What should we do for Ajmera Realty & Infrastructure?

    ReplyDelete
  8. superb article.... big salute to VP....

    ReplyDelete
  9. hi VP sir, recently Span Diagnostic has offered for buy back of shares. Isnt it a good sign? Whats ur view on Span Diagnostics for medium to long term?

    ReplyDelete
    Replies
    1. Company already sold major portion of its business and not disclosed further plans .Difficult to comment at this juncture.

      Delete
  10. Dear sir please your view on navakar corporation

    ReplyDelete
  11. Valuable tips sir. Very nice and detailed article. Thanks for sharing.

    ReplyDelete
  12. Sir whats ur view on mic electronics?? Its keep falling.. m quite worry now..

    ReplyDelete
    Replies
    1. Fall in stock price without any negative changes in fundamentals is not a reason to change my opinion.

      Delete
  13. Hi VPSir, Good Day.
    What is your view on Inox Leisure ltd, seems they are very aggressive in expansion of screens in near future.

    ReplyDelete
  14. Dear VP Sir,
    Is it advisable to buy sobha at cmp, after the recent low.

    Regards,
    Vipin V

    ReplyDelete
    Replies
    1. As you are aware , black money was a major driving force of real estate business in our country and now government taking many steps against it . Reduction in interest rate is generally good for companies in this sector and a sentimental impact may happen in near term. But if government become more aggressive against black money,real estate sector may not easily go back to buzzing days as many people expecting .Sobha, Godrej Prop.Mahindra Lifespace ..etc are comparatively good companies from this sector.

      Delete
  15. please update on inox wind, capital first and welspun india?

    ReplyDelete
    Replies
    1. Capital first is an already suggested one and nothing to update for the time being , not tracking others.

      Delete
  16. Hello VP Sir,

    I had shortlisted GruhFinance as one of the stock to purchase for a long term but the only part that is bothering me is that it looks expensive at current market price. Should i wait for a correction?
    Your thoughts would greatly help me, ThankYou!!

    ReplyDelete
    Replies
    1. Time to buy any stock is, not when money is in our pocket but when opportunity is there. No meaning in buying anything , if we feel it is over valued.

      Delete
    2. Dear VP,
      Alpha geo recently got order worth Rs.250 Crore.Which may be biggest one in company history.Do u postive on this compnay.
      Please reply.

      Delete
  17. Dear VP sir

    Pls share your views on Enkei wheels, Insilco and DeNora. Thanks

    ReplyDelete
    Replies
    1. If my memory is correct , both Enkei Wheel and De-Nora suggested around Rs.70 .Both stocks already gained more than 100 % from suggested level . Nothing new to add at current rate.

      Delete
  18. Dear VP Sir,

    Are you still positive on old reco "Universal Starch-Chem Allied"?

    ReplyDelete
    Replies
    1. Availability of raw material may be a problem in near future due to weather condition.In addition to that . company;s major plant is under maintenance for last one month which also expected to affect its performance. Not a compelling buy at this juncture.

      Delete
  19. Dear Value-pick,

    What would be your view about the recent developments about trade receivables in Tree house education?

    ReplyDelete
    Replies
    1. It is an issue , too early to make a final verdict

      Delete
  20. Hi sir

    Your call on Salzer Electronic after L&T exit. Its Still a long term stock.

    Thank you

    ReplyDelete
  21. Dear Sir,

    Your views on Dhunseri tea & technocraft industries for long term ?

    ReplyDelete
  22. Sir, your opinion on TRF ltd, this engg company was suggested couple of years in your blog, the stock appears at lows due to poor take off in investment cycle , thanks

    ReplyDelete
    Replies
    1. TRF suggested @ Rs.167 and went up to Rs.491 thereafter . But due to sluggishness in the industry in which it is operating ,company's performance is lackluster and expecting only a slow revival.

      Delete
  23. Dear Sir,
    Whether I can invest in Surya Roshni at CMP?

    ReplyDelete
  24. Dear VP Sir, One of your's High risk stock Lincoln pharma is giving good returns to the patience investors is this can be held for long term, Thanking you.Regards

    ReplyDelete
  25. Sir,
    Please provide your view on Banco.
    Thanks.

    ReplyDelete
    Replies
    1. Company is not bad, sector revival is the key

      Delete
  26. Dear valuepick,

    How do you see the impact of CREDAI north ban on ultratech, lafarge and shree cements. Will this put pressure on cement price per bag, effecting the likes of NCL INDUSTRIES.. Please share your views.

    Disc: invested in NCL INDUSTRIES after your suggestion and my study

    ReplyDelete
    Replies
    1. NCL selling in South and if my understanding is correct they are not in cartel.

      Delete
  27. hello VP Sir,

    I came across a stock recently - Bodal chemicals. Its topline is 1000cr whereas mktcap is around 350cr. It is growing consistently over the last few years and apparently there is demand-supply gap for the dyestuff segment they operate in.
    They also have bought a subsidiary through which they expect to generate 250cr sales from next year.

    The valuation of this stock seems very low with PE of close to 4.

    As a amateur investor, this seems like a good stock to me. However, I am afraid if I have made any mistake in my evaluations because its not clear why this stock is valued cheap by the market.

    Therefore, I appreciate if you can share your feedback, incase you are aware of this company.

    Thanks in advance,
    Srinivas Murthy G

    ReplyDelete
  28. Hello VP sir,

    Regarding DIC INDIA which has 3.2 acres in prime location in Mumbai(chandivali farm, andheri east). Could you please estimate the value of the same considering the value of the company itself around 600 crores


    Regards,

    ReplyDelete
    Replies
    1. Sorry , my knowledge is very limited about the land value in Mumbai.

      Delete
  29. Sir, do you track KELLTON TECH. Your views pls. Thanks.

    ReplyDelete
  30. Hi, ur view on Godavari drugs on CMP?

    ReplyDelete
  31. Dear VP,

    Would appreciat your comment on the merger plan proposal by Blue Star Info promoters, which is believed to be unfair to BSIL share holders

    Thanks
    Ravi

    ReplyDelete
    Replies
    1. Never expect such a move from promoters like Blue Star , really cheating.

      Delete
    2. Sir , Just wanted to understand . As the promoters sold the business for 180 crores , whether this 180 cr be distributed to all shareholders as they are a part of the company too ?

      Delete
  32. sir can i invest in ISGEC Heavy @ 4850 the CMP. is it good company

    ReplyDelete
    Replies
    1. A good company may not turn as a good investment if our entry is not at a good price.

      Delete
  33. Dear VP, I see my query on 'first time investor' thread, but awaiting its response. I will repost it here for your convenience:
    Recently you have suggested Era for high risk investors with long term view, I have done my fair bit of research and took the plunge, bearing in mind risk Vs reward ratio.
    The reward that I am assuming is through a policy correction by the govt that will be in favor of infra companies reeling under stalled and infeasible projects.
    but even before any change has happened I see that Era is jumping back from dead. I recollect a quote from Mr Buffet that it is during these times that we can get value stock at bargain price.
    My question to you is, do you know of any significant change in your outlook in this stock since recommendation....NHAI announcement; repo rate cuts; forming of indhradanush fund etc..

    ReplyDelete
    Replies
    1. Before jumping into conclusions, one should realize what I mentioned about Era Infra. Someone asked me about another debt ridden company and then I replied that I prefer Era Infra over that company .What I means - Era is suitable only for a person willing to take almost same level of risk he is taking while buying the other company.I don't think a huge loss making company can be termed as a 'Value Stock' , these type cases may turn as a turn around case and suitable only for those willing to loose even their capital .

      Delete
  34. Plz give ur view on everest industries.

    ReplyDelete
  35. Hi sir , your views on pincon spirit?

    ReplyDelete
  36. Sir, Whether I can buy Aksharchem (524598) at CMP?

    ReplyDelete
  37. Plz advice on blue star info sir.should one book out at cmp or keep holding parent company shares after the development????

    ReplyDelete
    Replies
    1. I don't like a management treating minority share holders like this .Making money in another company of same promoter is possible or not , I am not interested to support these type managements as a share holder.

      Delete
  38. Sir what is your view on Pioneer embroideries , your previous recommendation? Thank you.

    ReplyDelete
    Replies
    1. No change , don't expect turnaround over night.

      Delete
  39. Dear,

    what is the view on IDFC bank??? its good for invest Now???

    ReplyDelete
    Replies
    1. How you invest now before listing .?
      Whether a stock is good as an investment depends on its price , before a price fixed how one can say whether it is good or bad ?

      Delete
  40. Sir
    What will be the equity of PFRL post merger

    ReplyDelete
  41. Dear Sir,


    what are you views on IDFC after today's fall..?

    Thank you very much..!!

    ReplyDelete
    Replies
    1. It is due to de-merger of banking division.

      Delete
  42. VP Sir,

    Could you please share your view on Tata Motors , now the stock is trading nearly 52 week low, Is it good time to buy for long term hoping recovery of JLR business Asia and Europe by next fiscal.My concern also high debt equity ratio

    ReplyDelete
    Replies
    1. Down side may be limited , but it may move range bound in medium term.

      Delete
  43. dear sir, kindly let me know why my comments are not published

    ReplyDelete
    Replies
    1. You asked about MIC Electronics , the same question replied to someone above in last 2-3 days .Practically difficult to answer again and again for questions with same meaning in successive days.

      Delete
  44. Sir your views on godrej properties

    ReplyDelete
    Replies
    1. Replied about same sector/company in last three days

      Delete
  45. Dear VP,

    Please share your views on mangalam drugs.

    ReplyDelete
  46. Sir

    How is KSE Ltd for a long term...they have shown good consistent performance with good ROE...pls give ur view

    Thanks
    Anuj

    ReplyDelete
  47. Sir would u plz like to give ur views on th demerger of idfc

    ReplyDelete
    Replies
    1. Banking portion may show better growth prospects.

      Delete
  48. Sir, I want to invest in IGL as it has not fallen much during recent downturn in markets, overhang of Court case is far behind & Recent gas price cut. Do you think I can go ahead at current price

    ReplyDelete
    Replies
    1. Not a bad company , but stock may be a slow mover. Suitable for passive long term investors.

      Delete
  49. Hi Sir,

    I have recently started reading your blog and it has inspired me towards stock picking from long term perspective. I wanted to check with you if you are tracking Rane Holdings. One of its unlisted subsidiary is an airbag manufacturer and is one of the biggest Indian manufacturer in that space. I believe that airbags should become mandatory in near term for passenger cars, which will give a huge delta to the manufacturers. However, airbags business is still very small portion of Rane Holdings. Do you reckon Rane Holdings is a good buy at current price?

    ReplyDelete
    Replies
    1. Rane TRW is the airbag maker which is a 50 % subsidiary of Rane holdings. I think only because of this airbag element , Rane Holding is not a but at this price.

      Delete
  50. Sir...I bought 5000 shares ilfs engineering at 90.can I hold?

    ReplyDelete
    Replies
    1. It depends on your conviction , for me no change in previous opinion.

      Delete
  51. Hi VP Sir, Can you give me your input on FIEM and Force Motors?
    Thanks in advance for your time:)

    ReplyDelete
  52. Sir your views on HFCL, Berger Paints and Havells India

    ReplyDelete
  53. Sir plz give yor views on shekhawati poly

    ReplyDelete
  54. sir please give your input on morepen lab

    ReplyDelete

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