Humans have a natural tendency to follow the crowd, but when it comes to stock market investing, following the crowd can often result in losses. Why replicate the mediocrity of the masses when you can clone the success of the World’s Greatest Investor?
The 7 stock market secrets/investment secrets of warren buffet have got unveiled here. These share market secrets will help you uncover and understand “How to win in the stock market?”
Why does these 7 remain as a Secret?
A fact or idea or strategy remains as a secret because it is less known or not known to most of the people.
Ex: How does Google rank various web pages? This is kept as a secret by the people. Most of us don’t know about this.
The 7 secrets of investing in the stock market will not fall into this category.
There are another set of secrets. A fact or idea or strategy available in open source but less practiced or not practiced by most of the people.
Ex: Values and life lessons explained in holy books. These are available to us in an open source. But practiced by very fewer people.
The second category of secrets is not so easy to follow or implement but worth it.
The 7 secrets of investing are stock market may sound known already in some form. But will definitely give you a new perspective.
7 stock market secrets are:
The first secret is: Look at quality businesses; not just the stocks
This is the first and foremost of the 7 Stock market secrets.
Warren Buffett said, “When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying a store down the street.” Most investors don’t analyze the businesses they invest in. They simply follow the symbols or brands of successful corporate houses.
If you are buying a shop, you will analyze about
- the products dealt by the shop,
- overall sales,
- the consistency of sales,
- competition for the shop,
- competitive strength of the shop,
- how the shop will manage the change in customer trends and so on.
We need to apply a similar logic before choosing a stock. Don’t think that you are only buying a few shares of that company.
Will you buy the whole company if you had enough money?
Getting a satisfying answer for the above question from yourself is the first stock market success secret.
Thinking along these lines will help you uncover the first secret of stock market trading and investment.
10 Financial Ratios that can reveal the quantity and quality of business:
An in-depth analysis on the below ratios will help us become successful with the first secret of the stock market.
1. P/E RATIO
2. PRICE-TO-BOOK VALUE
3. DEBT-TO-EQUITY RATIO
4. OPERATING PROFIT MARGIN
5. PRICE/EARNINGS GROWTH RATIO
6. RETURN ON EQUITY
7. INTEREST COVERAGE RATIO
8. CURRENT RATIO
9. ASSET TURNOVER RATIO
10. DIVIDEND YIELD
These ratios help us
- Understand the real worth of the company.
- Get to know the financial soundness of the company.
- To compare a company with its peers.
Please do your homework with these ratios of the company in which you are planning to invest. This homework will help you pass the first share market secret.
Activity:
The answers to the following questions will reveal how far you fair with reference to the first secret of share market investing:
- Do you clearly understand how this company makes a profit?
- Can you explain the above answer to a 12-year-old?
- Do you have unshakable trust on the future prospects of the company?
Bonus Tip:
If you think, identifying a good share then you can choose a good equity mutual fund. The mutual fund manager will identify good stocks which will pass the above tests.
The second secret is: Are you willing to own a stock for 10 years? If no, then don’t own it even for 10 minutes.
Once you find a quality business, you need to decide will you own this stock for 10 years, which is the second secret in the 7 Stock market secrets.
Only buy something that you’d be perfectly happy to hold if the stock market shut down for 10 years. In the short run, the stock market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the stock market is like a weighing machine–assessing the substance of a company.
Looking at the short-term opportunities in the stock market will not be a long-term successful strategy. If you don’t feel comfortable owning something for 10 years, then don’t own it even for 10 minutes.
This second secret of stock market success can be rephrased as “Stop thinking short term and start thinking long term”
Ignoring the short term outlook and giving significance only to the long term outlook is a key stock market secret tips.
Insights on the second secret of stock market investing:
- Don’t get infatuated with a stock because of the temporary rumour or hype in the market.
- Don’t invest in a stock to make quick money. You may end up making quick losses as well.
- Be a part of the long-term success story of the company and not to capitalize on the current news making situation of the company.
The third secret is: Check thousands of stocks and look for very high bargains
Avoid investing based on the stock market tips or recommendation. Do your own research. Analyze thousands of stocks before choosing the right stock to invest. That is one of the secrets to win in the stock market. Once you have chosen a right stock, wait till the share is available at a very high bargain price. Buying a right stock at the right price is the key to investment success. Investors have the luxury of waiting for the “fat pitch”.
It is really difficult for an individual investor to analyze thousands of stocks and finding out the right time to buy a stock in the stock/share market. If this is the case, you can outsource this Portfolio Management Scheme to a professional financial planner or wealth manager. But you need to be careful in choosing a professional financial planner who is capable and at the same time customer centric.
The third secret of stock market success can be achieved if you have time and patience or by outsourcing it to the right expert.
Insights to implement the third secret of investing in the stock market:
In order to master the third secret of investing in stock market, you need to do two simple things
i. Identify a good stock after doing a thorough and in-depth analysis of 1000 companies.
ii. Buy that good stock at a very good bargain
The fourth secret is: Scrutinize how well management is using the resources.
Check how efficiently the management is using its resources like money, manpower, and material. This management efficiency will, in turn, reflect in Return on Equity and Return on Capital.
This is a very simple and profound secret for stock market success.
A company will have resources of different types like
- human resources,
- financial resources,
- physical resources and
- knowledge resources.
All these resources need to be used efficiently. Only when all the resources are used optimally, a company can continue to deliver consistent profits. For sustainability of the business, efficient resource management is important.
Any wastage or under utilization of resources by a company need to be taken as a warning signal when investing in the stocks.
This efficient management of different resources is the fourth and profound secrets of stock market success.
The fifth secret is: Always stay away from “THE HOT STOCKS”
The hot stocks are those stocks which have some attention-catching activity such as severe volatility in share prices, high trading volume or when the stock market is in news. Stay away from these hot stocks.
Warren Buffett once said, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Hot Stocks Vs Boring Stocks
Hot stocks can easily bust. Hot stocks become hot because of the sensation created by news media. This sensation increases the expectation. The increased expectation will work against you.
Stocks which are not in the limelight; stocks which are boring will eventually deliver remarkable results.
Boring stocks and Plants:
Boring stocks are like plants. It is really boring to watch a plant grow. They share a lot of similarities.
- The growth is very slow.
- Less interesting to watch them grow.
- Watching the growth has less curiosity.
- But the end result is rewarding.
- Needs a lot of patience to wait and see the growth.
- No smart moves can bring quick results
Identifying the unnoticed and undervalued stocks is really an important secret to the stock market success
Not falling prey for popularity is an important stock market tip/secret
The sixth secret is: How much money you will make?
Before investing in a stock or stock market calculate ‘how much money you will make’ in this investment. Of course, you need to make a few assumptions to do this calculation. But do calculate. Most often investors tend to ask the share is undervalued or overvalued. Identifying the intrinsic value of the stock is difficult and the various models available to calculate the intrinsic value are faulty. Warren Buffett wrote in a report “Unless we see a very high probability of at least 10% pre- tax returns, we will sit on the sidelines.”
Begin with the end in mind.Have clarity on the expected returns before you invest is one of the secrets for the stock market success.
How to estimate the return from a stock?
- we need to take into account the expected dividend and the expected share price appreciation.
- Share price appreciation can be estimated by taking into account the change in Earnings per share and change in P/E ratio
Look before you leap. Calculate the ROI before you invest. This is a simple but sound stock market secret.
The seventh secret is: Get rid of the weeds and water the flowers — not the other way around
People have this tendency of loss-aversion. That is when the share price has fallen down by 50%, they choose to wait. They convince themselves and others by saying “It will definitely come back”.
Also, people will rush to book profit when their shares go up just by 10%. In effect, investors tend to keep the loss-making shares with themselves and they offload their profitable shares. Actually, it needs to be the other way around.
This stock market secret of “keeping the winning stocks and getting away with the losing stocks” will pay a vital role in you becoming the successful stock market investor.
Emotional Barrier to master this secret of investing in the stock market:
i. Non-acceptance: Not able to accept the fact that we have made a wrong investment decision and the inability to accept the loss makes us retain and continue the loss-making investments.
ii. Pride and Impatience: To showcase our pride of achieving we may tend to sell the profit making shares. If we could patiently wait longer, we can make huge profits.
Though this is the last secret of the stock market success, this secret is the most important and not to be neglected secret for the stock market success
Conclusion:
These 7 stock market secrets properly applied in the Indian stock/share market would be your road map to riches.
In order to strengthen your road map to riches, you need to strengthen that with a clear route map in the form of a financial plan.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in
Author Bio
Very well written. Time to reinvent the known strategies.