At this stage we expect that the investor has done the preliminary preparation to undertake his investment management exercise. However, it would not be unusual if the investor were unprepared and seeking a path to get ahead. While not detracting from circumstances where he would be standing at a crossroad in life and seeking purpose and direction afresh.
1. The investor realizes that he is on his own. We are our own boss, and are both the employer and the employee. In a matter of speaking we are reporting to ourselves. If the sequence of steps and actions we implement is correct we are justly rewarded and if they are wrong we are punished.
This is to bring to your attention that, we cannot indulge in a blame game. Of course, there are no free lunch tickets. If an error is observed it must be corrected immediately.
2. Are we up to the challenge? It is advisable to do a SWOT analysis on ourselves and our present circumstances. We are to consider whether we:
# are secure in our present circumstances.
# have the frame of mind to take on risk and wait long enough to achieve profitable returns.
# have gained an understanding of investment management and the processes involved.
# have a documented plan of action available.
# have done a 'what if' analysis to know in advance what we would do given the various circumstances and situations the equity and other allied markets would put us through.
3. Do we have the commensurate resources available? Given our present secure circumstances, we should have commensurate personal free reserves available to start the investment management exercise to develop a profitable portfolio of stocks and other financial instruments.
4. Have we a good association with a trustworthy market intermediary (broker)? As individual investors we cannot deal directly in the equity and other markets. We would have to take a broker alongside.
The selection of the broker is of importance. We must realize that a brokerage is a business entity in itself; and profits from the brokerage that we investors pay them to execute our transactions on the trading floor of the exchange. In fact some banks (like in India) have developed fully functional brokerage arms.
We as investors have a choice, and there is nothing personal or emotional about the selection of this broker we would be dealing through. We must always go for the best (optimal) deal available.
5. Have we prepared a project report? The investor must prepare a project report, and may avail the services of a consultant to do so. The individual investor must also do periodic reviews to ensure that the integrity of the objective is maintained in all his transactions. Any deviation from the objective must be corrected. However, in certain circumstances we may consider modifying the objective to include the deviant action as it may have proved profitable over a period of time.
Using the brief list above as a guide, the investor may use his or her own initiative to increase this list of things to do for their preparation. However, most visitors to our website are seeking ways to get ahead; and are probably at a stage in life when they wish to take a look at where they have reached and which way to go forward. Usually at this crossroad, there is also a lacking of adventure and newness of things around them; most get attracted to the stock markets seeking adventure or to bring some zest back into their lives. Most just talk amongst their friends meet up with their friend's broker and their investments are based on the tips and salesmanship of the broker. Some would find success although not long lasting, while others would be faced with failure at the very start. Both these circumstances would be counterproductive with regard to their development as investors.
There would be a safe and more profitable way forward, if only the person would step back and appreciate that investing in the stock market and even the other markets like forex and commodities would be an enterprise even if it be at an individual level. Therefore, requiring a study, learning and understanding of not only the investment environment, but also the selected market's trading platform and systems; along with an understanding of where it all fits in with the larger economy of the country, region and the globe.
The investor would be called upon to also develop his own investment system and methodology; and would require a further study; which would be theoretical to start with. Reading of relevant books on investment analysis and portfolio management would be quite in order to gain this understanding and knowledge. Investment wisdom would be gained along the way through the experiences the investor would gain in the real time investment world. In fact, there are thousands of books written on this dynamic field of investment analysis and portfolio management and all its parts; I would recommend a reading of the following books:
- Security Analysis by Graham & Dodd
- The Intelligent Investor by Benjamin Graham
- One up on Wall Street by Peter Lynch
- Investment Analysis & Portfolio Management by Prasanna Chandra
- Options, Futures & Other Derivatives by John C. Hull
Although the list of books provided is not exhaustive, it would make for a good starting point. After reading these and other books selected by the investor himself, it would be time to develop the investment system and methodology. While the system would help the investor transact (both on the buy side and sell side) the stocks selected for onward investment, the methodology would enable the setting up of a structure to enable an optimization of profits on the one hand while reducing the occurrence and quantum of losses on the other.
The investment system with regard to selection of stocks for onward investment would enable the investor to differentiate and categorize stocks into investment grade or otherwise; and the investor would invest only in and amongst the investment grade stocks he may have listed based on his learning upto this stage. Of course, a further segregation would take place with regard to the investment grade stocks while the investor gains more knowledge on the one hand and with reference to the inflow of information (corporate decisions, quarterly and annual results, etc.) on the other.
The investment methodology would enable the investor to buy stock positions or parts thereof and a subsequent build up of the stock position as a part of a larger portfolio; at points of time and price where there would be a limited downside, and the likelihood of the occurrence of an up move in price would outweigh a down move. It would also enable the investor to sell the stocks at a profit to enable on the one hand a reemployment of the investment capital in other investment grade stocks within the time horizon of the short term investment cycle in progress, while on the other enabling the generation of a turnover to the investment system and methodology in progress like any other enterprise. It would also enable the investor to have in place a stop loss for situations and circumstances which may cause the stock position not to perform along expected lines during the short or medium term time horizon. Usually such profit targets may be maintained at 17% to 20% while the stop loss trigger may be placed at an 8% erosion of price value. Of course, these percentages would be net of transaction cost including brokerage and taxes and may even vary marginally during the real time management of investment transactions.
Thereafter, the investor would be called upon to test this investment system and methodology. While the price volume data pertaining to the investment grade stocks selected for the investment portfolio for the test would be real time, the transactions themselves would be documented in a diary for this exercise without the application of real money in the transaction. Although the subsequent decisions taken to manage these stock positions as a part of a larger investment portfolio would be documented in the diary, the profits and losses of such decisions and follow through transactions would be on paper; and would not result in any real loss to the investor. But, the diary documentation with regard to the investment decisions taken and paper transactions carried out would be subsequently available for analysis and to understand and improve the investment system and methodology. This would be mainly with a view to maximizing (or optimizing) the profits while minimizing the losses.
Depending on the time the investor allocated to this matter of starting to invest, the reading of the books, understanding them, developing the investment system and methodology and testing it would take anywhere between two to three years.
At this point in time, the investor would be called upon to set up the trading platform to enable real time transactions on the stock exchange selected for the investment exercise. Usually such platforms may be available through select banks which may have on offer the 3-in-1 account (which would be a set of linked savings bank account, a demat account and an etrade account) to enable seamless transactions on both the buy side and the sell side at and through the stock exchange. The investor would also be required to understand the mechanics of operating such an account.
The alternative of course, would be to select a brokerage house with impeccable credentials offering a similar set of accounts. But, in this latter case of a brokerage house there would be a separation between your savings bank account along with the demat account maintained at the bank and the etrade platform maintained by the brokerage house; with the result that the transactions would not be seamless as in the former case of the 3-in-1 account of the selected bank. In any case, caution is advised while selecting the brokerage house for the setting up of the trading platform.
Thereafter, investment transactions executed by the investor through the trading platform of either the select bank or brokerage house would be in real time and would have real time ramifications whether profitable or otherwise to the investor.
Although, it may be a difficult task initially, the investor would be well advised to firstly follow the tenants of his investment system and methodology; secondly, to keep emotions away from his investment decisions and transactions; and thirdly, to initially implement stop loss triggers in all his transactions. It is only with the passage of time and gaining of knowledge, experience and wisdom in the real time investment environment that would qualify the investor to afford a certain level of confidence and latitude with regard to either further increasing the returns (or profits) on the one hand while reducing losses on the other.
As a word of caution and a disclaimer of sorts, the investor must appreciate that the above description is academic; and may successfully work for some while denying others. The investor would be required to document his own investment management learning process and associated curve; and subsequently analyze and appreciate whether he has been able to achieve a level of learning and understanding to enable successful investments in the stock market. It would be fair to say that the investor is well within his right to call upon a mentor who may guide him through the nuances of the learning process and subsequent real time investments.