Part 1: How should beginners approach investing in the stock market?

by Manshu on March 14, 2012

in Investing for Beginners

Krishna left the following comment (slightly edited) a few days ago:

I am a techie and I am preparing myself to start investing in stocks. Google revealed your post & I really admire your work.It will be more helpful if there is a post describing investing for novices like me.

Regards,
KK

This is an interesting comment not only because of the nature of the question but also because of its timing. I wrote a post titled Why I continue to invest in stocks? in December of last year, and in that post I laid out the reasons that made me continue to invest in stocks in the pessimistic environment that existed then.

That title sounds fairly ridiculous today, but remember at that time and this is just 3 months ago, there was a lot of doom and gloom with respect to the situation in Europe and a lot of people were simply disgusted with the way stocks had dropped.

The common concern at the time was whether it made sense to continue with SIPs or should you sell all your stocks and invest in fixed deposits? Not many people were gearing up to invest in stocks because of all the pessimism that surrounded them and there were hardly any new entrants to the market.

From the time that I wrote the post to the time this comment appeared, the market had rose by some 15% and some smaller stocks had risen by a lot more than that.

I think it is important to remember the background here because a market that goes up rapidly draws a lot of first time investors who really are speculators at the time. I know that I was attracted to the market because of this and I know countless other individuals who were drawn to the market with the hope of a quick buck.

At this stage all you’re interested in is speculation and day trading, and you are getting quite the thrill out of it. You have no idea of fundamental analysis and you don’t care about any technical analysis as well.

I’ve seen people who stay at this stage for years, and you can easily identify people in this category by the the kind of reasons they give for why something will go up or down. The reason will always be rooted in something that they have personally seen like this share never goes under Rs. 80 or the share market does well before the budget or something similar to that, and this reason will usually sound very fantastical to anyone else.

You should try to get out of this stage as soon as possible losing as little money as possible. It’s very hard to convince anyone that they will lose money before they lose money so the next best thing I can say is that you should speculate with only small amounts of money and then don’t lose heart when you lose it because there is a better way to invest in the stock market.

At the end of the first stage, one of three things will happen -

  1. You will blame the market for your failure, be disgusted by it and never put any money in it again.
  2.  You will blame yourself for your ignorance and learn more formal methods of technical trading and trade.
  3. You will blame yourself and learn about long term investing and investing in stocks through mutual funds and SIPs.

Normally, the people who blame the market for their failure are the people who have been at it for a few years, and keep trying the same thing over and over again and hope that this time they get different results even though this has never worked for them earlier.

If you fall under this category meaning you’ve traded for a number of years but have never read a book on trading then instead of blaming the market you should blame your process and get into doing something more structured – whether it is technical or fundamental analysis.

Far more people fall from the first stage to the second category and I think that’s because trading is a lot sexier than long term investing and the kick you get out of trading – you can never get out of buying and holding.

In this category you will find people who are familiar with things like Elliot Waves, Head and Shoulders Patterns, RSI, MACD and other technical analysis tools and I think trading like this is better than trading without any knowledge of technical trading at all but I am skeptical on how effective this is.

I’ve not seen any really successful technical traders but then I’m not the kind of person who knows many traders either. However, I do feel that it must be very hard to do a full time job and trade on the markets since you have to be in front of the terminal so often and it can’t be practical for someone with a regular day job to do that.

In any case, this has not worked for me so I’m biased against it and I wouldn’t recommend anyone with a regular job to get into technical trading. If you’re interested in this then there are far too many investment sites and blogs that cater to this and you should follow one of them and see if it works for you. If it doesn’t, then, well, try long term investing after that.

In my opinion it is far better to take a longer term approach to investing and get into the third category of investors. This blog is primarily geared towards long term investors and later in the week I will have a second part to this post on what this constitutes, and how a newbie can approach long term investing.

This post is from the Suggest a Topicpage

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{ 39 comments… read them below or add one }

youmkesh March 14, 2012 at 8:13 am

where is the part the reader requested?

about how to invest?

not the stages and pitfalls of a trader.!

duh!

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Manshu March 14, 2012 at 6:16 pm

Agreed that the part is missing…..probably should’ve had a warning that this post is not meant for people who skip prologues and go straight to chapter 1 :-)

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Manikaran Singal March 14, 2012 at 8:36 am

Very nicely written and explained article manshu. I loved every line of the same. I believe that one should have to understand himself firts than the basics of investing. One should always ask himself – What’s the reason to enetr stock market? what’s attracting the most? Are you really interested in understanding the basics or you want to learn the ways to earn fast bucks?As you have rightly pointed out ,”…market that goes up rapidly draws a lot of first time investors who really are speculators at the time”.I have seen practically that people enters with a long term mind frame but always looks for short term benefits.The heuristic behaviour i.e putting excessive weight on recent past history” and the lure of instant gratification are 2 major hindrances which doesn’t let investors to make money in stock market.

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Manshu March 14, 2012 at 6:19 pm

Like you, I think instant gratification is a big part of that and if sooner or later people should recognize this factor not only in stocks but other aspects of life as well.

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Raja March 14, 2012 at 9:22 am

Nice topic and nice flow of thoughts. Will wait till the last part before i jump in with my inputs ;) Hopefully it will be ‘I’ve nothing to add’ :)

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Manshu March 14, 2012 at 6:20 pm

I’m sure you will have something useful to add :-)

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harinee March 14, 2012 at 9:55 am

There is no single formula to markets. Every once in a while somebody gets famous for his stock picking skills. At the most fundamental level its speculation or gambling. Most of the big names remain big is because the minute they test a stock everybody knows it and goes for it.A great bit of luck also is involved.
I know people talk about fundamentals etc but you never get to know whats going inside a company no matter how big or small e.g Satyam,Enron,KFA many more.And the market is too manipulated for a small time investor to understand what happens.Only safe way is blue-chip stocks(again I think of Reliance who is not doing so well) or mutual funds.People make a living out of investing in stocks and still don’t get it right so studying a few books ,reading charts will not make you a winner.I am reminded of Jesse Livermore who is considered father of technical analysis and how many times he went bankrupt and his end.
You cant time the market only patience and controlling greed will pay long term.

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Manshu March 14, 2012 at 6:21 pm

If you really believe that it is gambling at the fundamental level, then there is no point in investing in mutual funds also since they will then in turn invest in stocks, right?

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Rohan Doshi March 14, 2012 at 9:57 am

Simply Excellent Article !!!
I could my own journy in every stage you have mentioned.
I also entered the market in late 2007 and started buy/sell based on tips by my local broker.
My holding period use to be 2 months to 12 months and most of my investment were done through IPO at that time.
So come the Jan 2008 and i have filled 2 applications for 1 lakh from my friends and my mothers account and there we saw spectacular bubble burst .. ;)
since that day i havent invested single penny in stock and through whole 2008-2009 ..
i saw my investment getting reduced drastically day by day..
it was only good run in 2010 .. where i sold most of investment and reduced my losses..
At this stage i was in category 1 and later in 2011 .. i finally moved to category 3 by entirely skipping category 2.
When i moved to category 3 .. then only i found out about your blog.. and since then i am glued to it..
keep doing your great work… it really helps lot of people like us… :)

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Manshu March 14, 2012 at 6:24 pm

I’m certainly glad that there was at least one person who commented saying there were parallels, that’s certainly encouraging! Also, interesting to read your story and I’m sure a lot of people will identify with it.
I can make it a full post if you want to expand on it – write some details and what you learned along the way, I think it will be of value to others who are in this situation. What do you think?

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Ashok March 15, 2012 at 8:34 am

My investing life has run similar to Rohan Doshi’s. I used to be a IPO fanatic in the good old days of 2006-07 till the bubble burst in 2008. I also trimmed my stocks portfolio in the 2010 rally and now I invest only through Mutual funds. Skipped stage -2 completely.

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Rohan Doshi March 16, 2012 at 9:27 am

thats really sounds like great idea…
If my story is any help to others then i would be most thankful to share it.
Will provide you all the details… Just let me know your mail id ?

Thanks !

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Manshu March 19, 2012 at 4:39 am

Awesome Rohit! – I just sent you an email about this.

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Ramesh March 14, 2012 at 11:12 am

Long term investment is the most common advice given to novices. But when you have a peak on a buziness channel on TV, or look at a website like moneycontrol.com or rediff.com etc. , everyone talks of buy this share now and sell this share today, which is virtually day trading. Is there any authentic website, which purely believes in long term investments and gives their recommendations accordingly?

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Manshu March 14, 2012 at 6:26 pm

The best place I’ve found for stock recommendations is magazines like Business India or Business Today that don’t give out recommendations but talk about companies in general and feature a lot of companies. That’s a good place to get leads, and that’s about as much as you should expect if you want to pick stocks independently. That’s a lot of work that you must be willing to do yourself else it’s better to stick to mutual funds.

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bemoneyaware March 14, 2012 at 11:19 am

Great post and great timing of the post. When market rises people are attracted to it. And with technology advances investing in stock market seems so easy..just few clicks away, so tempting for software people.

As you rightly pointed out investing is different from trading and one should know why is one getting into the market. Often people who enter stock market for first time in rising market scenario and make gains ignore the fact that A Rising Tide Lifts All Boats

I commend Krishna for trying to find out more before entering stock market and congratulate his good luck on landing at onemint. (maybe envy him a little as I wish I would have been in his boots in 2005 May on both counts when I thought of entering stock market :-)) After going through the first stage I moved on to You will blame yourself and learn about long term investing from mistakes. The process is still on!

My mother-in-law gave a mantra which I try to follow : Put a maximum limit on how much you need to put in stock market with the idea that if I loose everything in stock market it would not cause me to loose my sleep and my financial position. She has seen many of her relatives being washed away literally due to stock market.

Waiting for Part-2

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Manshu March 14, 2012 at 6:32 pm

I don’t really know how much landing on OneMint might have helped you! It’s just a blog :-) If Krishna hadn’t landed here he would’ve landed somewhere else and did pretty much the same thing.

Don’t misunderstand me though I deeply appreciate your kind words!

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bemoneyaware March 16, 2012 at 9:57 am

“Dobte ko tinke ka sahara hi kaphi hota hain”(for a sinking man even blade of grass is sufficient).
Unlike school which has a definite curriculum learning about money doesn’t have any curriculum and jargons (TDS, Form 16, basis points, CAGR, absolute returns) are so confusing with so many choices in every product. Often we get paralysis by analysis.

For a product, especially when a new product comes in the markets such as LIC Jeevan Vridhi one looks for information which highlights both pros and cons. That is where onemint fits in for a reader letting him know both sides, in addition to the posts which he never would have (I didn’t) thought of venturing like calculation of Sensex, what India exports imports etc.

Yes there are many blogs and many of them are great too., I personally follow many. But when google throws up onemint.com in it’s search and you like the blog then one keeps coming back and back. The number of increasing readers of your blog is a proof enough.(Time you change the banner to 8000 readers from 6000 readers :-))

Keep up the good work!

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Manshu March 19, 2012 at 4:37 am

I’m just going to change it once when it crosses 10,000 which I hope it does :-)

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ANIL KUMAR KAPILA March 14, 2012 at 12:29 pm

Hi Manshu
Like you I am also for long term investing only.So, waiting for part-2.

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Manshu March 14, 2012 at 6:30 pm

This might be the shortest comment you’ve written :-) I’m used to more critiques from you!

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Ramesh March 14, 2012 at 11:01 pm

thanks, Manshu.

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Krishna March 15, 2012 at 1:05 am

Well, One mint is not just a blog,its THE BLOG.Thanks a lot Sir.

On one of the members suggestion, I am reading “One Up On Wall street” by peter lynch.It is interesting to note that right from chapter 1 he was pointing to long term investing.Huh, What a coincidence.
I guess, Great Minds think alike!:D

keep up the great work.

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Manshu March 15, 2012 at 4:48 am

Not so much of a coincidence when I tell you I’ve been reading Graham, Buffett and Lynch for over a decade and have tried to copy and emulate as much of their process as possible!

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Krishna March 15, 2012 at 1:13 am

Dear Sir,
Thanks a lot, for answering my queries.But be on the lookout for a lot of Questions from myself & people like me ;)
The reason that I would like to enter into stock-market(NO,still now I havent got into stocks) is maybe 1.I might be desiring for more money.
2. The intriguing challenge it possess,
As for the first post is concerned all 5 star ratings,You read my mind precisely & hopefully, even predicted the future!

Waiting impatiently for the second post!

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Manshu March 15, 2012 at 4:47 am

So, to the extent that you want to get a higher return than fixed deposits and match market returns that’s fine and that will probably work out but anything significantly more than that will probably not be possible for a sustained period.

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ANIL KUMAR KAPILA March 15, 2012 at 7:30 am

Hi Manshu
When I first started investing in equity mutual funds through relationship manager of my bank, I was asked this question-What is the objective of your investment?
My answer was-To get higher returns than fixed deposits.
It was only much later after going through TFL via One Mint that I learnt that-Returns can not be your goal of investment.
Most of what I know about personal finance is because of TFL and One Mint.So full credit goes to Hemant and you.It is only through these blogs that I have learnt about SMART goals, Short, Mid and Long term investing.

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Manshu March 15, 2012 at 8:00 am

Thats very nice of you to say -thank you!

The object of taking risk that can reduce your investment by half or even more (equities) is to earn a higher return, else why would anyone get into it at all.

The overarching philosophy that governs how much you invest in equities or fixed return products will of course be governed by things like risk appetite, age & income level etc. Both things have to be kept in mind & appreciated.

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ANIL KUMAR KAPILA March 15, 2012 at 8:48 am

Hi Manshu
Yes, asset allocation, diversification and rebalancing are all very important.

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Jitendra P.S.Solanki March 15, 2012 at 9:57 am

Manshu,

Very good post.

Many youngsters come with such queries and i personally feel its good to have some basic knowledge before one can start investing. At age 23-24 you do not have much liabilities and hence are highly agressive. This leads to unrealistic expectation. Visit any forums today and the best question i can see is -How can i become crorepati in 5-10 years. And the bigeest reason i found is not undesrtnding what is wealth and how it is created.

Hence, in my view its will be a wiser approach to study yourself a bit about stock market and how it behaves.In fact some websites run simulation games related with equity markets. Once you have a general awareness you will be able to decide why you want to invest in equity market.What objectives can be met through this asset class and where you can make mistakes.

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Pradeep September 13, 2012 at 7:12 pm

how can i buy shares?
Tell me something about shares

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Jijin Mohan March 25, 2013 at 7:32 pm

I ended up here through Google search, helpful article Mashu sir, I’m also a techie and nowadays planning to hit the stock market with some small investments. Subscribed to your posts. Kudos for these awsome shares. :)

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Manshu March 26, 2013 at 6:04 am

Thank you, looking forward to read more comments from you.

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Intraday Tips May 2, 2013 at 12:56 pm

Great post and great timing of the post. When market rises people are attracted to it. And with technology advances investing in stock market seems so easy..just few clicks away

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Roshni July 24, 2013 at 9:10 am

Nice post. Thanks.

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Shivappa Hosamani September 12, 2013 at 1:43 pm

I need to know more about shares , means how to sale/purchase shares in india stock market.

Also i need to know, what are the action need to take before investing money in share market.

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rajat May 12, 2014 at 2:09 pm

sie i can help you out

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Nirav July 8, 2014 at 9:43 pm

completely agree with the 3 points you noted down that most of the market failures generally blame.

1You will blame the market for your failure, be disgusted by it and never put any money in it again.
2 You will blame yourself for your ignorance and learn more formal methods of technical trading and trade.
3 You will blame yourself and learn about long term investing and investing in stocks through mutual funds and SIPs.

Even after this if someone is exploring the 3rd one its safer, in case of 1st and 2nd, situation will be more or less same in the future!!

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Padmini July 31, 2014 at 2:40 pm

Great article. I was looking for some beginner level information on how to invest in stock market and came across your article. It was a nice read. I am looking to invest some funds for my niece’s future who will be 1 yr old in August 2014. Is share market a good place to invest? I’m doing this investment as a gift, on her 1st birthday.

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