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How to make Nifty Returns

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How to make Nifty Returns

 

What does it take to be a successful long-term investor?

 

Most of us do not have the luxury of time so that we can dedicate ourselves to the art of becoming a great investor. We live in the real world of demanding day jobs and even more demanding families. So how can people like you and I become successful long-term investors? Here is my `cheat sheet' to investment success for those who are willing to apply themselves even for a few hours each week.

BE REALISTIC

Have a realistic expectation of what sort of returns equities can deliver for you. On a cross-cycle basis, Indian equities will give a return broadly equal to the cost of equity in India, which is around 15%. Given that this is the long-term return from Indian equities, if the Nifty has delivered far higher returns three years in a row, it is a time to start becoming circumspect and, in all likelihood, it is time to start selling. On the other hand, if for three years, the Nifty has given returns well below 15%, it is probably time to start increasing your exposure to stocks. However, for you to make such rational (or contrarian) decisions, you need to have realistic expectations about returns on your investment around which you can base your buying and selling. Otherwise, you are highly likely to run after the herd and earn cross-cycle returns well below 15%.

It helps if you don't look at the share prices of your investments frequently. c Unless you have a mind which is immune to what the ticker is doing, you really should not be looking at the prices of your stocks any more than f once a month (actually, once per quarter is ideal). And when you do look at prices, do so at a time when the market is shut and when you are in a stable frame of mind. In fact, I would suggest that you don't watch the financial news channels or your Bloomberg / Reuters s terminal during market hours. That's one way to prevent your reflex brain being tempted into poorly thought investment decisions. If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short term losses. If you count your money every day, you'll be miserable.

Another way to protect your portfolio from your reflexive mind and its ability to make inaccurate but overconfident predictions is to diversify your portfolio - a sensible portfolio should contain at least 15 stocks. Chosen properly (from a mix of sectors and market cap size buckets), 15 stocks should give you protection from overexposure. Obviously, you can have many more than 15 stocks in your portfolio if you want (most professional investors will have at least 40 to 50 stocks) but the incremental utility (from the perspective of diversifying your portfolio) of adding stocks to your portfolio diminishes rapidly once you go north of 15.

THINK IT THROUGH

Ask yourself `What could go wrong?' Rather than focusing on the current stock price and how much you think the company is worth, ask yourself `What if the business is worth only half of what I think it is?' or `What if the company has a reputational scandal tomorrow, can the business recover from the scandal?' Only after you have convinced yourself that even with stock price getting trashed in the market, you can still afford to live with the downside risk, should you go ahead with the investment.

COOL IT

Take it easy. Since over-activity is not going to result in investment outperformance, there is no point in taking anything other than a measured approach to in vesting. A relaxed, stable mind which is unaffected by what the rest of the herd is saying is likely to be able to swim through the tides of greed and fear that sweep through the stock market. Unsure through the stock market.

Unsurprisingly therefore, investment legends in India and elsewhere tend to be cool, calm, collected people.

FOLLOW THE RULES

Lay down simple investment rules and follow them. For instance, only buy the stock if you understand the business model; only invest in companies which can generate cash flows and provide a high return on capital employed for long periods of time and so on. These seem to work for a number of seasoned professional investors. A similar set of rules which lay down simple parameters for what you will and will not consider for investing will be very helpful for you. Entering the stock market without such a set of rules is like setting sail without a compass (or a GPS).



 

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