The Hindu Business Line : 5 rules to follow and 7 mistakes to avoid

THE secret of Sachin is Boost, but what's the secret of successful investors? "Ability to think independently," states the foreword to The Five Rules for Successful Stock Investing, by Pat Dorsey, published by Wiley (www.wiley.com). The book is a "guide to building wealth and winning in the market" from Morningstar, a Chicago-based investment research firm. For those `expecting to make a large amount of money with only a little effort', the intro has some sobering analogy — that such a goal is like "expecting to shoot a great round of golf the first time you pick up a set of clubs." If you're impatiently waiting to know the five rules that the title talks of, here they are: Doing your homework; finding companies with strong competitive advantages or economic moats; having a margin of safety; holding for the long term; and knowing when to sell.

Homework helps you understand the business you want to invest in. "Unless you know the business inside and out, you shouldn't buy the stock," because it is your money at stake. `Economic moats' keep competitors from attacking a firm's profits, explains Dorsey. The key to finding if a company has this is to ask: "How does a company manage to keep competition at bay and earn consistently fat profits?"

Okay, you've found a company to invest in, but have you assessed what it is worth? "You can't just go out and pay whatever the market is asking for the stock... The goal of any investor should be to buy stocks for less than they're really worth." Play for the long-term, because short-term has its costs that can burn a hole in your pocket. Yet, it would be too ideal to hold on to investments forever, so you need to know when to exit. Don't, however, make the mistake of selling the winners and hanging on to losers. "The key is to constantly monitor the companies you own, rather than the stocks you own," is a key tip. "It's far better to spend some time keeping up on the news surrounding your companies and the industries in which they function than it is to look at the stock price 20 times a day.

Assuming you already know the seven good habits, here are `seven mistakes to avoid': "Swinging for the fences; believing that it's different this time; falling in love with products; panicking when the market is down; trying to time the market; ignoring the valuation; and relying on earnings for the whole story." Small is beautiful, yes, but "finding the next Microsoft when it's still a tiny start-up is really, really difficult." Unfortunately, "many smaller firms never do anything but muddle along as small firms, assuming they don't go belly up, which many do." Not knowing market history is a sin, and Dorsey lists the four most expensive words on Wall Street: "It's different this time." What do you do if an expert is saying that line on the TV? Turn it off and "go for a walk." About the `love' business, remember, "Although great products and innovative technologies do matter when you're assessing companies, neither matters nearly as much as economics."

Well, you believe in good times, and bad times, and so want to time the market. "There is no strategy that consistently tells you when to be in the market and when to be out of it," declares the book. "Anyone who says otherwise usually has a market-timing service to sell you." No better time to read this.

BookValue@TheHindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Ultratech Cemco: Accept

Overdraft on car

Adding mystique to the Qualis

Question `n' Auto

Why expenses can make or break fund returns

Understanding fund costs

Mutual fund IPOs: Contrasting styles on offer

Taking stock of TCS

Sundaram Growth: Hold