How to create Wealth? A simplistic approach!

There is no sure-shot formula to achieve success in stock markets. We have compiled some golden rules which, if followed prudently, may increase your returns in stocks:

1. Think long-term:

It would be crazy to check the stock price every day and take a decision to buy or sell purely based on it. Investing over the short-term is a gamble. Investors should look beyond the day-to-day noise and think long-term, maybe few years or better for a decade.

In Berkshire Hathaway 1996 letter to shareholders, Buffett began by noting, "Our portfolio shows little change: We continue to make more money when snoring than when active." Inactivity is the main criteria for investing. The main goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments

2. Only invest in what you understand:

This is one of the famous investing mantra preached by Peter Lynch's in his well-known book One Up on Wall Street. Peter Lynch believes that the average investor's best bet is to stick with companies that they understand well. Peter Lynch also advises that consumers can spot trends that don't necessarily show up in Wall Street analysts' numbers. He further believes that individual investors can outperform Wall Street investment managers as individual investors have some advantages. Individuals are not restricted by an investment policy statement. For example, say an investment manager cannot hold more than a certain percentage of assets in cash. Whereas the retail investor doesn’t have any such restrictions. 

3. Learn to Filter out the market noises:

Veteran investors don’t believe everything they hear in the news. They base their decisions on long-term growth of the stocks – not just on spikes. They don’t panic about looming bubbles or crashes and in fact, they use the downtrend as an opportunity to invest in quality stocks. The famous quote of Lao Tzu “Those who have knowledge don’t predict and those who predict don’t have knowledge” holds good, especially for the stock market.

4. Time in the market is better than timing the market:

Investors should allocate a fair amount of money in the quality stocks and in fact, increase their investments whenever the stock is available at a fair price. Conversely, they should stay away from the market when it is in full momentum. Investors should know that is the futile to time the market. It is never a wise strategy to time the market – which simply means selling out at market tops and buying back at market lows and repeating the process over and over. Portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission that must be paid in a given year.

5. Don’t Panic:

Sometimes correction grips the market and you will become emotional. At times when you get into market crashes such as the one experienced in the year 2008, you will be forced to sell your portfolio based on the paper losses. The simple advice is: Don’t panic.  Markets will correct themselves every now and then. This happened in the past and will happen in the future too. During the crash, it is better to study your existing portfolio and find the reasons why you bought them in your portfolio. After this analysis, you should check if the reasons for buying them still holds good. In case you are convinced by the reasons, you should add them during the correction without any hesitation. 

6. Follow a disciplined investment approach:

Volatility is the giant killer of the stock market. The market confuses all investors using the destructive weapon called volatility.  However, as a retail investor, you can benefit from it. If you deploy money systematically, in the right shares and hold on to the investments patiently it can create nest eggs. Hence, it is prudent to have patience and follow a disciplined investment or systematic approach besides keeping a long-term broad picture in mind.

7. Do not put all your money in equity:

While the stock market is regarded as the wealth-generating machine it is not advisable to deploy all your money in shares. It’s better to keep some money away from the markets. Recurring deposits. FD’s are the most common cold storage devices for keeping the money. You can use the safe money whenever the market makes sink. Usually keeping 20% of the portfolio in cash is advisable. It is also better to diversify assets in the different asset class such as real estate. It’s prudent to understand that real estate is an illiquid asset.

8. Do not invest in leveraged funds:

Invest only your surplus funds and never ever use the borrowed money to deploy in stocks.  The main problem with the borrowed money is that it creates bias and exerts a lot of pressure on you.  Finally, it distracts you from your regular routine and forces you to take the wrong decisions. Playing with your own money is always safe as it allows you to live simple and laser-focused, and to avoid dead-ends.

9. Have realistic expectation:

When it comes to stock market, investors expect a huge return of anywhere between 50-100%. The same set of investors are happy with an 8% return on a fixed deposit. Warren Buffett is one of the world’s richest men — and he has made his shareholders an astounding amount of money. Buffett's Berkshire Hathaway has made 21% annual growth rate from the stock market in the last 50 years which should clearly inform the investors what to expect from the market in the long run. Earning in excess of 15% is considered to be a very good return in the Indian market.

There may be many more but these nine rules are essentials to increase your stock market returns.