How NOT To Invest in Stocks
Since I started this blog, a few people have been asking me if I will give stock tips. Others asked if I had invested in stocks and that is how I made enough money to retire. So I thought I should clarify a few things to my readers through this post. First, I don't give stock tips because I don't know how stock markets work and more importantly I don't know how to value a company. I have always wanted to learn how to value a businesses, but never got around to doing it. Next, I had invested only once in one stock and that is all my experience in stock investment.
When valuing a business, the only analysis I subscribe to is fundamental analysis. I don't believe in technical analysis, momentum based investing or various other schools of investing. So I took a few classes on how to read balance sheets and P/L (Profit/Loss) statements. Read a few books on value investing, understanding moats and other principles related to fundamental analysis. Yet, my proficiency is so low that I've never attempted to value a business.
I am dumb as a...
This blog is for the do-it-yourself (DIY) investor and not a paid service for handing out stock tips. If you really want stock tips you can search on the web. There are many sites offering stock advice (for a fee of course). Value research also offers such a service. Remember, I don't recommend, advice or endorse anything, so value research is just an example.
Some other type of people ask me my thoughts on put and call options and other strange terms. While I know what some of those terms mean, I have never used any such exotic style of investments. The only thing I know is equity and debt mutual funds. Nothing more. Not sure what these all knowing people are doing talking to a dumb person like me?
An Experiment Gone Wrong
I will give you an example of how things went wrong when I tried my hand at stock investment. I normally don't invest in anything that I don't understand, yet I wanted to experiment with stocks. You already know about my previous experiments like my gilt funds, index funds and peer-to-peer lending experiments. Anyway, after reading about a stock from a blogger I respect, I researched it a bit. Then I read about a famous value investor who was also invested in that stock. That gave me confidence to invest.
If you don’t understand something, don’t do itWarren Buffett
I invested about Rs. 12 lakhs in this stock. After 5 years, the stock lost 67% in value! I ended up selling it for a huge loss. I got just Rs. 4 lakhs out of the deal. That was a failed experiment. So investing based on stock tips can be injurious :). Please go through the adventure only if you understand the risks and can analyze the business properly. I am not saying you should not invest in stocks, just understand the risks. Anyway I probably should not have run the experiment with such a concentrated portfolio of just one stock.
I was initially supposed to invest Rs. 10 lakhs at most as an experiment, but as the stock plummeted I bought even more hoping to average my losses. Eventually I ended up investing Rs. 12 lakhs. The heights of stupidity I tell you. I have never before or ever after invested in stocks. That was the one and only stock investment. It does not mean I will never do it again. I may try if I can do proper business analysis which is in itself a difficult art to learn and execute. So don't ask me stock tips because I don't know :). The only silver lining is that I was able to offset some of my capital gains with these losses to reduce taxes.
I have always kept my investments pretty simple except when performing these experiments. Going for exotic investments, chasing returns can be dangerous. If you ask me, simple investment with proper asset allocation will give you a lot of free time and peace of mind with average returns. On the other hand, if you want to invest in stocks for higher returns, make sure you enjoy the process of analyzing businesses, stocks, and economy. Put some effort into analysis and always diversity. Alternatively, pay for a good service and invest according to their recommendations. Of course, finding a good service is a task in itself.
If you still insist on DIY stock investment, please take a look at the video below. You will understand how very few companies are available to invest. Make sure you have at least read and understood the books mentioned. The author explains everything in very simple terms. If you don't understand the basic finance terms then I wonder if you really are a DIY investor :). In that case don't invest in stocks without advice from some expert service. Thanks to my colleague Naveen B for sharing this video!