Investment Ideas for Small Investors
You must have come across numerous stock investment experts giving their views on stocks, but small investors hardly find them useful. Stock investment is an activity like driving a bicycle, the learner gets better with time and practice. A small investor becomes wiser with experience. There is no one rule of thumb that we can say can be used for total success in stock market. It needs to be a combination of different stock investment rules applied together to get maximum results. Small investors in particular (who so not manage their portfolio very actively) shall note and follow all the below discussed rules of stock investments.
Invest in stocks for long term
I am a big believer in long term investment in stocks. Warren Buffett advocates to stay invested in a companies stock forever. Personally I know investors who have held few Indian shares like Tata Steel, Reliance, SBI, Infosys for decades. But of-course this buy-and-hold strategy does not always work. World has seen the downfall of giants like Xerox and Kodak with evolution of technology and competition. It is equally important to time the selling of constituents of a portfolio than buying.
Investing systematically in Index funds or Index ETF's
Index investing has worked well in developed economies of US and Europe. In India and Chine where the economy is still growing, index investing may fall short best possible returns. Index investing will give returns in proportion to average market returns. In developed economies, actively managed funds rarely outperform the index. Investors who has invested systematically (passively) in indexed linked funds beats the big financial jig-wigs. But in developing economies like India, where selected companies have possibilities to grow at a faster rate than others, will beat the index. Studies show that in lat ten years Sensex has grown at the rate of 15% per annum, where as a diversified equity fund has given a return of over 20% to 30%.
Small investors should not try to time the market
Trying to time the market is not for small investors. Instead it is better to invest systematically through mutual fund SIP route. Another strategy that may work for small investors is to accumulate money and buy shares at points when stock market is weakest. When I call weakest, I means moments of time like 2008 global economic crisis where index fell to 5000 levels (now 17000) levels. You will get the hints like the stock market has crashed, worse ever fall in years, biggest financial crisis of recent times etc. Investors like Warren Buffett can wait for such moments for year without investing a single penny. The objective is to have enough at these moments when stock market is at its rock bottom. From such low points stock market can only go up and at giving returns 100%.
Small Investors shall learn Value investing
The technicalities and jargon of value investing can be learned form text books and million of online articles on value investing. But I would give my own view of my understanding of value investing. If practiced to its core, value investing is the best stock investment proposition for small investors. Theory is to invest in companies like Microsoft, Coca-Cola, Gillette, Reliance, Infosys when they are starting. Yes you heard me right, identifying companies of tomorrow is the prime job of value investor. If you will invest in Reliance of today you may get 10% to 12% annual returns (CAGR) in next decade. But if you would have bough shares of reliance in 2000-01, by now you would have made at least 20% annual return (CAGR). This clearly beats the index average index return of 15% for the last 10 years. So keeping new of growing sectors and specific companies in particular is important for value investors. Companies that is showing strong growth prospects in times to come shall be bought and hold.
