Tarun Shah of Sharekhan

On a winning wicket

There is lot of learning for the investors from the recent events both on the cricket ground and in the stock market, says Tarun Shah, chief executive officer, Sharekhan.

It is time to celebrate in India. The superlative performance of men in blue in the world cup has rejuvenated the entire nation. No wonder, the party that had already started at the Dalal Street is further gaining momentum. Nifty has ignored the rising crude oil prices and all the other concerns to further build on the rally of the past couple of weeks.

There is no magic formula for winning on the cricket ground or making profits in the equity markets. The key is to follow some basic and simple rules to make it an enriching experience. Here are some winning strokes for the investors.

First, have a game plan in place. The difference between winning and losing side lies in the level of preparedness. Not only the team needs to be aware of its own strengths and weakness but also that of its opponent and play accordingly. The team selection is also done to suit the pitch and the playing conditions.

Investing in equities is no different. Investor who take efforts to carry out careful due diligence before investing into a particular stock and also regularly review the portfolio are winners in the long term. Moreover, given the element of risk involved in equity investing, it is important to invest in those categories of stocks that suit your risk appetite. For a conservative investor it would be wise to have large part of exposure limited to reputed large companies with proven track record rather than illiquid (penny) stocks with questionable quality of management.

Second, reduce risk through diversification. The most amazing part of the Indian victory in the finals was the team�s ability to score the required runs despite the failure of icon like Virender Sehwag and Sachin Tendulkar. Other players including the captain rose to the occasion. Similarly it is important to diversify your risk by buying into a basket of stocks from different sectors and market breath rather than having concentrated bets on one or two stocks. High exposure to just couple of stocks is a risky investment strategy.  

Third, game of cricket and short-term market movements can be very unpredictable. It is foolish to pre-empt either of them and place huge directional bets on the same. It also shows that it is practically impossible to time the markets and much better to invest in a systematic and phased manner. The trick is to invest in a systematic and phased manner over a long period of time. Systematic investing enables the investor to even out the impact of market volatility as the buying takes place at various price points.

Fourth, it is all about managing the pressure. The difference between the winning Indian team and the competing teams in the semifinals  (Pakistan) and finals (Sri Lanka) was the ability to stay clam and perform under pressure. Indians are fortunate to have a very composed MS Dhoni (nick named �The ICEMAN�) as the captain of the cricket team. Similarly, investors who managed to hold their nerves in the falling markets and bought into stocks at lower levels are winner today when the Sensex has moved up by more than 1500 points in a very short period of time.

Fifth, learn from your mistakes and take appropriate corrective actions. It is human to make mistakes but foolish to not acknowledge them and take corrective action. Be it a competitive sport like cricket or equities, mistakes are not easily forgiven and you have to pay a heavy price. Indian team was lucky to have got away with selection of Sreesanth instead of R Ashwin on a turning wicket at Mumbai. Importantly, the Indian captain acknowledged his mistake and did put in the required extra effort to make up for the same.

No doubt, it is very important to have patience and give enough time for the fundamental story to play out and subsequently reflect in the share price. But, at the same time, it is equally important to take appropriate action in case of an unexpected change/event that has serious implications on the fundamentals of a particular stock or sector on the whole.

By not ignoring warning signals and acknowledging mistakes you can potentially avoid huge losses. A typical mistake many new timers make is to mix up investment and trading portfolios. If a particular trading call has gone wrong, acknowledge and cut your positions rather than shift it into your investment portfolio and wait for a miracle to turn your losses into profits.