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Following Warren Buffet, and other mistakes to avoid while investing in stock markets
It's easy to get carried away by numbers and record highs. Here are some key mistakes to avoid while investing in the stock market especially when it's too tempting
—Paul Samuelson, an American economist, and Nobel Memorial prize awardee
Investing in the stock market is a serious affair and a long-term game. But still investors tend to succumb to their emotions every time the BSE Sensex reaches a new high. There have been many firsts for the stock exchange. When it hit 1,000 for the first time, it was an all-time high, and the story and excitement continues with every new record, whether it's 10,000, 20,000, 40,000 or 50,000. One day, Sensex will cross the 100,000 mark and then 500,000. Yes, of course, we don't know when that will happen. But some basic rules of investing don't change no matter what record the markets have broken—the important thing to remember is that market high is not a destination, it's a journey, a journey towards wealth creation.
And for this journey to be smooth and fruitful, I am going to share some tips before you decide to invest in the stock market while it rides the bull.
In the end, the market keeps proving everyone wrong and that is why you need to avoid thinking too much about it and shift focus to your asset allocation and risk profile. In a quest to beat the market, you may end up getting beaten, so control the controllable, i.e., your behavior and hence, your money.
Similarly, people invest in a lot of meme stocks or trending stocks in India as well on the basis of news for a quick gain. Know the fact that most of the time when a stock is trending, it is trending for the wrong reasons. It's important to remember that you are investing in the businesses and not stocks. Find good businesses, and avoid investing in the meme and penny stocks. Understand your risk profile, financial goals, and do thorough research before you pick any stock, the way you do it before buying a car or a house.
But people wrongly interpret his diversification advice and restrict their stock investments to three or four stocks only, which puts them at a huge risk of having a concentrated portfolio, a risk you cannot take unless you are Warren Buffet. So always diversify, unless you have the time, money, and the expertise to select stocks like him.
Remember that his investing is different from yours as he can practically buy out the entire company. So, you need to diversify and have a good asset allocation by spreading your investments not only into good quality stocks but also in real estate, mutual funds, stocks, gold, provident fund, Public Provident Fund, National Pension Scheme, and more—depending on your risk profile, financial and aspirational goals, and the timelines to achieve them.
So, don't look at the price in the three-six months timeframe and instead, look at the business and what it can do in the next three to five years. Don’t bother about what RBI is going to do tomorrow or how the market will react tomorrow. It's better to focus on the long-term.
It's risky to play with your hard-earned money, but if you're too tempted, then fix an amount, ideally, about two-five percent of your savings that you may afford to lose, and play your hand. I call it fun-burn money.