Shadow investing - how reliable is it?
If your tyre went bust on the roadside, and you had all the material to repair your tyre, but no idea about how to do it, what would you do?
29 Jun, 2021
9 min read
2375 Views
The idea of investing is to enable your capital to grow. In fact, capital growth is in the very definition of the verb “to invest”.
According to the Oxford dictionary, to invest means “put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit”.
The better the earnings received at the end of an investment’s term, the smarter the investment has been. Of course, not everything is in the investor’s hands – you could have invested wisely but some other factor could have come along and ruined your thoughtfully laid plans. That’s what risk is: the potential for things to go wrong and the investor to experience losses, even though he has done everything right. In most cases, risk cannot be completely eliminated – it can only be minimized. And then there’s the whole risk-reward relationship. In most cases, low risk can mean lower potential for growth. Potentially high rewards often come with high risk.
So how does the investor eliminate his risk and guarantee big ticket rewards? Well, we’re going to tell you upfront that there’s no way to do that. However, you can minimize your risk while you reach for big rewards. In fact, that brings us to our first hack.
Remember that figuring out how to make money in the stock market is an ongoing process. And understanding how to earn in the stock market is a process of research as well as hands-on learning, not to mention constantly updating both your theoretical and practical knowledge
Hack # 1: Save time. Skip the “guaranteed returns” mails and messages in exchange for actual research.
Anyone promising you guaranteed returns on the stock market is lying. The stock market is influenced by a variety of forces – social, political and economic. Can anyone guarantee the exact date that the monsoon will arrive in a given year? Nope – because although we track the south-west monsoon winds and anticipate a monsoon season from June until September, there’s no way to predict which day the first shower will take place. That’s exactly how it is with the stock market. Sure you track companies based on their financials and sure demand and supply economics come into play but so do a lot of other factors.
People who guarantee you returns are most often playing the 50-50 game. Allow us to illustrate: People are betting on the India-Australia match. Mister Suspicious tells 50% of the people that Australia will lose the India-Australia match and he tells the other 50% that India will win. He tells them that he will refund their money if he is wrong. He has no idea who is going to win but if India loses, 50% of the people pay him. If India wins, 50% of the people will still pay him – you get the drift.
Spend your time upgrading your knowledge and awareness – understand the different types of investments (called asset classes), keep tabs on your portfolio, and stay in the know. Treat each investment with care and evaluate a company’s profitability, track record, competition, sector-specific environment and outlook before you invest.
Hack # 2: Diversify your portfolio.
A diverse portfolio places some capital in equity, some in mutual funds, some capital in fixed-income investments, some in commodities and then if the investor still has good amounts of capital left, he might also consider real estate and private equity. Let’s spell these out very quickly
- Equity = stocks. This is your high reward, high risk investment, but even within stocks you should ideally further diversify your portfolio across sectors and risk.
- Mutual funds = stocks + bonds (or equity and debt). Mutual funds are seen as less risky than stocks because your capital is pooled with other investors and put into the supposedly capable hands of a fund manager who then chooses stocks and bonds for the investor capital.
- Fixed income = anything that tells you how much you will get upfront like a public provident fund or fixed deposits. This is the safety net. Low reward, but very, very low risk. The risk here is negligible because in most cases – unless the bank closes down – the investor gets back his capital and the promised interest by the maturity date without fail.
- Commodities = essential commodities such as agricultural produce, energy, precious metals and livestock. Of these, most investors choose to go with gold, and they may invest in physical gold, in gold bonds, or in gold exchange-traded funds (that is mutual funds that track gold and are traded on the stock market).
Hack # 3 Practice rupee cost averaging
This practice buffers investors against the highs and lows of the market. It is most often practiced in mutual funds. When an investor parks capital in a mutual fund, he is buying units of the mutual fund. These units have prices that fluctuate on a daily basis and in the long term (usually) increase steadily. An investor typically wants to buy units at the lowest price possible and sell them at the highest price possible in order for there to be a big difference between the price he sells/ redeems at versus the price he buys/ invests at. The wider the difference; the higher the earnings.
As a result, many investors try to invest a fixed amount at fixed intervals irrespective of whether the market is high or low. Since the amount is fixed, one automatically purchases more units when the market is low and fewer units when the market is high. In the long run, the cost of buying these units averages out.
Hack # 4 Learn the art of value investing
Value investing refers to only purchasing stocks that are trading below their actual worth or their actual value. Very much like shoppers who wait for the Diwali sale to buy refrigerators and TVs, value investors wait till the stock price (of a company whose stock has tremendous worth) falls and will only then invest in such a company. One needs to study a little to understand the concepts of intrinsic value and PE ratio (price to earnings ratio) to wrap one's head around this concept. However, this is the concept used by famously successful investors like Warren Buffet and his professor Benjamin Graham. In fact Graham has written a whole book on how to earn in stocks by use of the value investing technique. Basically you are looking for a stock price that is lower than the company’s earnings.
Hack # 5 Tech a short cut
If you have researched enough to have a strategy in place, you can use algorithm-based technology to help select stocks. Angel Broking’s SmartAPI for example lets you key in your strategy in English and then creates an algorithm for you. You can even (back)test the algorithm to see if it works before you deploy it.
You can diversify your portfolio, conduct research, understand concepts and get your trading account off the ground within hours using the free-for-use Angel Broking app. You can also get expert advice, company financials and historical data on various stocks and mutual funds – all in one place and right in the palm of your hand. Kick-start your investment journey with Angel Broking – everyone can invest, irrespective of age, gender or occupation.
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