Three Questions to Ask Yourself Before You Invest in Markets

 We are living in unique times, we have access to latest stock market gyrations there are financial gurus blabbering about stock picks all day on the financial news channels, the markets after seeing a severe fall in March -April due to Covid-19 pandemic have recovered fully with SENSEX touching the new highs of 50k, the free time that people got from sitting at home in the lockdown has caused many people to join the markets, online discount brokerage firms like Robinhood, Groww, Zerodha have only helped more people invest in the markets.

 Some people are calling this the biggest bull market while others are saying there are bubbles in the market, but either you are a new investor or someone thinking of joining the euphoria to make some easy money you must consider whether you should trust you savings and hard earned money to a volatile creature like Mr. Market? Let us find out.

Peter Lynch one of the greatest investors suggests that before you think if a company is a good investment or not you must first look in the mirror and ask yourself following questions:

Q1. Do I own a house?

Real Estate is one of the best investments you can make, there are numerous advantages when compared to investing in stocks, first of all the Govt. and banks are all willing to help you in it, you can take a loan and even tax benefits from buying and selling of house, you get to a roof to live under, your investment does not go bankrupt and becomes worthless (stocks often do), you don't get live updates of prices changes for your address every second, your investments protects you from recessions, so you are not worried about anything, and all you need to do is just wait on your investment , you are also well versed with picking a good house, you know what things to look for, you visit the locality and see the amenities yourself (instead of buying a stock of some company whose only presence you know is on news channel), and most importantly since prices don't fluctuate daily, you won't get scared and sell off your house early and allow the compounding to do its magic. I hope your priorities about investments are clearer.

Q2. Do I need the money?

Everyone likes to gain extra profits but stock markets can be volatile , over the long run (5-10 years) it is possible to understand and predict (although predictions would go wrong) stock prices, but even with the safest companies it might not be possible to know how the prices would behave in short term (Reliance Industries was at Rs 2200 when foreign investments were flowing into it and now it is trading at Rs 1850 short term prices are unpredictable), if you need the money you would be forced to sell at lower prices and take losses even though there was nothing wrong with you investment, it is important to invest only the amount that you don't need and will not affect your life in case you loose your money as  loss is always possible.

Q3. Do I have the personal qualities that will bring me success?

If you are looking to be an active profitable individual investor then there are certain traits that you must exhibit:

Patience: It often happens that stocks take their time , you will have to wait and not start booking minuscule profits or get terrified and books losses, good investments require time to grow, it often happens that a stock price barely moves for years and then it suddenly rises.

Example Look at Eicher Motors stock 500 to 10500 but it took six years for the gains to realize.

 

 A tolerance for pain: Not every stock you pick is going to be a winner, you will pick losers and loose money on them, even on winners it might be possible that you might have to see your portfolio in loss , one must not get anxious and either sell off all the investments or make riskier investments to recover the losses, for success in stock markets all you need is 60% of your stock picks making money for you and making more money than your losses in 40% of losers, also if those 40% losers could make you lose your sleep, think that you are dumb, cause tension within your family and  may lead to you to completely avoiding markets  and hence miss out the winners. The most important part of investing is your psychology and how you respond to markets, controlling your greed, pride and fear.

Humility: One must be humble enough to know and realize when you have made a mistake instead of arrogantly trying to defend one's stock positions, a lot of people get married to their stock positions, having humility prevents you from hanging on to losers.

Independent Mindedness: If you wish to invest in stocks you must not be following what crowds are doing, best opportunities for buying stocks occur when others are too fearful to invest in the markets, while some of the biggest crashes happen when every guy with some money decides to speculate in the markets, not being swayed away by every news headline is crucial to long term success in stock markets. John D Rockfeller said "Be greedy when others are fearful and be fearful when others are greedy."

Now do you think investing in stock markets is for you?, I would advise you to ask yourself these questions and educate yourself as much as you can before you decide to take the risk.Everyone likes to tell their gains from markets very few discuss the losses.