If you are new to direct equity investing and wondering how to start – best approach would be to do what Mutual Funds do in terms of setting up their portfolios. Below are quick 10 pointers to get started,
1. Diversify – across sectors, across businesses, across geographies as well.
2. Invest only after you have understood the most basic aspect of how the company generates profits or plans to in the near future (new-age businesses).
3. Better to allocate major portion atleast 90% of your investments in to proven businesses- proven means a business which is profit making across longer business cycles (2-3 decades plus).
4. The remaining 10% could be your riskier bets including new age businesses – key aspect is you know you may lose all this money while you learning basics of reading financial statements, understanding business cycles, new age valuation theories and differences in various sectors.
5. Try and invest in what you can touch/feel/experience in your daily life – e.g FMCG products, Autos,Paints, Banks,Jewellery are common examples. It will start to make you look at the finer aspects of why some businesses doing well over others. The reason maybe You! You prefer certain toothpastes, beauty products, cars or e-comm over others. That would be the basic moats of the businesses.
6. Stay away from sectors or stocks which don’t fit in to criteria of #5 – e.g specialty chemical or CRAMs create no instant recall in our minds – you need time to evaluate such businesses.
7. Learn to stay with a business at least for 4 quarters initially. read and attend their quarterly conference calls. Anything less than that would not give you enough time to understand what they do or can in the future.
8.Start with moderate returns expectations – little more than FD rates per year.
9. Build conviction and concentrate more as you understand businesses better than just that random tip, news noise and volatility of the stock price.
10. Ground to the fact that this is a 24*7 learning process. You never become a true expert at predicting markets, stock price etc. It’s ever evolving and ever changing and that’s what makes it an ever-fertile learning ground.