The basic concept underlying fundamentals is that bulls/bears make money and pigs get slaughtered. This pithy adage captures the essence of fundamentals- Greed may be good in some ways, but it is not a friend in the stock market. Apart from this basic there are other signs you should heed while investing in the markets. Wondering if any of this involves reading tea leaves or gazing into a crystal ball? Certainly not!The market follows logical yet creative rules and predictions don’t work, persistence does. Good things come to those who work hard, better things come to those who are patient, but the best is only possible if you never give up and this hold true in the stock market.
Why Fundamentals?
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Taxes are not your enemies, but your friends
Even if gains are short term, taxes are permanent. What makes them an important aspect of trading is that they are far less taxing than the losses that can accrue from the fundamentals market, if you are not careful. Worrying about the tax man instead of market strategies is sure to get you annihilated.
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Fools rush in where angels fear to tread
A wise adage says rushing in to charge can get you in front of the firing line, and this is so for trading in fundamentals as well. If you tried eating a whole week’s worth of dinners in one go, a big problem will result. So, no matter what your appetite for risk, buying or selling all at once can be disastrous. Stage your purchases or sales gradually and don’t rush in or you will be wasting your time. If you watch out for the flipside, the benefits will eventually gain on you and ensure you are ahead in the game. So catch the risks and downside early in the trading process or this game changer will become a race against time (and the markets).
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If you put your eggs in one basket, don’t count on not getting scrambled!
Oil in the 1980s, tech stocks in 2000s and pharma sector in 2015…what is common across all these markets? The fact remains that putting all your energies into a single stock instead of diversifying is likely to have multiple drawbacks for you. For one, the notion of sector risk is maximized. Narrowing your options will limit scope for growth. Sector risk constitutes 50% of the entire risk of holding on to a stock. In the markets, you can weather the perfect storm if you mix enough different sectors in your investment portfolio. Diversifying means buying or selling stocks that are not similar to each other. Controlling risk through diversification has its rewards in the long term.
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Want good grades? Then read up!
If you don’t do your homework, don’t expect to get good grades in the stock market. Research all aspects of the company otherwise you can get caught in the classic trap of investing without knowing thereby betting instead of Trading. Opt for companies that are top performers if you want a good return. Investing in an expensive stock will cost you less trouble in the long run, if it is worth every penny you spend on it.
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Trade only when you can defend your turf
If you race to protect all stocks, instead of a chosen few when times get hard, you will not last in the market. When trading gets tough, choose only your preferred and prioritized stocks instead of a more generalized approach to fire fighting.
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Don’t invest if the company is sinking, for it will never learn to swim
Abandoning a sinking ship is a primary rule in the markets. Bad firms will never get bids, so focus only on good fundamentals. Choose some positions you like and stick to them. In the markets, persistence pays in every sense of the term.
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Strike when the iron is hot
A good mindset is needed to attain excellent results in the market. If you are not in a positive mainframe, it is not the right time to invest in fundamentals. Expect corrections, don’t fear them. Be ready for the blow when it strikes, so that you can evade it.
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Watch more than the stocks
Observe the condition of the bonds. Why so? Simply because stocks are to bonds what Donald Trump is to Hillary Clinton. Direct competition prevails in the markets between stocks and bonds. Never trade based on emotion. Choose logic instead. Only trade when you are in a position that is flexible otherwise the sun will set on your trading sessions and you will be left in the shadows! Take a cue from others and invest when the signs are positive. If denizens of the stock market are giving up, so should you. Unexpected shifts in the market are recognized by signs such as quitting of high level executives, an IPO that didn’t get a good response or a product that fails to sell.
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Don’t buy into the hype
Wall street can make tall tales and the same holds true for stock exchanges around the world. If you have a yen for believing rumors, the Nikkei will not reward you. Do not underestimate the power of the promotion machine and double meaning analysts who see profit where there is possibility of none.
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Buy or sell only when you are sure
Buying stocks may be a solitary event, but the movement of the markets is greatly influenced by diverse factors across the globe. You need to be clear about your reasons for investing before you take the plunge. To make a reliable profit, you have to understand what a stock is really worth and how much others are willing to pay for it. Stock prices fluctuate for many reasons ranging from a report from a stock analyst to wider macroeconomic news happenings. There are as many different strategies as there are players in the game. Not everyone opts for value investing or evaluates information in the form of a free cash flow. So, rationality and market investment may not always go hand in hand. The strong grip of trends and patterns in deciding what the final movement will be is a foregone conclusion. What is equally important is looking at the actual numbers in hand and the margin of safety if you don’t want to fall into the clutches of wrong market strategies.
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Invest only when there is clarity regarding the fluctuation of business values
Stock prices move on account of valuation. This is an important part of investing principles. Concrete valuations are often hard to assess. The clue lies in checking the business decisions which are the basis of tangible evidence that stock prices will change.
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Be clear when price changes create opportunities for investing
Markets may not be rational when stocks are priced everyday. But rather than getting caught in a herd mentality, value investors have opportunities to purchase great companies at really reasonable prices. Price changes create a point where investing in certain fundamentals will yield rich dividends. Use the discounted present value calculation to check if price has dipped to a point where it is a real bargain.
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Greater the price drops, better the bargain
If price falls further, you get a better bargain. Always keep the safety margin in mind. Remember if you do not invest money, you will not lose any, but you will also never make the money. Market folklores indicate many patterns and trends. Price drops represent a factual piece of evidence which can be used to assist market investment decisions. Volumes of trade may go down in certain periods, but knowing when to buy and sell ensures you don’t lose out on the gains.
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Recognizing limitations is important
Market guru Warren Buffet has expounded the following words of wisdom- one does not need to be an expert to attain satisfactory investment returns. Recognition of limitations and keeping it simple should be the focus.
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Assess the future productivity of the asset in objective terms
Stocks can only be an asset because they indicate future profitability. In the absence of the possibility of gains in the future, it’s a no brainer that you need to get out rather than holding on and hoping things will improve in the future.
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Bigger picture is not always better
Forming macro opinions and listening to market predictions which are not based on actual numbers is likely to cost you. To quote finance expert Ben Graham, investments are most intelligent when they are businesslike.
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Little knowledge is a dangerous thing
Do not invest in fundamentals you don’t fully understand. Consider the risks involved and always invest after considering all the implications. If something is too complicated to understand, it is probably riskier to invest in too. So, don’t be lured by structured products that promise rewards at the cost of too many risks.
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Market timing is a waste of time!
Market timing refers to investing somewhere towards the lower ends of the market cycles and getting out at the top. But what is simple in theory is complex in practice. Money flows into funds and markets only when they go up and vice versa. Demand rises as price increases making fundamentals Giffen goods for investors. If you think timing the market will work, consider the paradoxes involved before buying into this simple reasoning.
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Check the cash drag, watch out for the fees
Fees are paid to advisers as well as fund managers and this can drag the investment performance. Income from investments should be secured against commissions and fees which will swallow it completely. S0, while hiring a high profile investor will increase your chances of profit, it will also lower the cash in hand.
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Too much of a good thing can be bad
Over diversification can also have negative repercussions for the investor in the long term. Portfolio diversification will improve your investment performance but going beyond a certain point can prove counter productive. If you diversify beyond a certain point, you will know less about investment.
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Do not invest to avoid tax
From VC trusts to enterprise investment schemes, these financial vehicles aim to ensure taxes are not the road bumps in your path to prosperity. But if you consider that it is cheaper to pay the tax rather than avoiding or deferring it, you will find concrete success for your financial roadmap to perfect investments.
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Don’t settle for the better when you can go for the best
Good companies refer to those which make high returns in cash terms on capital used and reinvest part of the cash flow to grow business and compound investment values. If you think that investing in less than superlative companies will yield long term results because such companies are “ going to improve” when management changes or there is a merger, you are in for surprise. Why invest in better companies when you can go for the best? Never compromise on the quality while investing in fundamentals.
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Remember the Golden Mean
What goes up must come down and markets adhere to a certain balance. So while there may be a bull or bear market for some period of time, saner long term valuation levels will eventually be reached. Don’t think that the bull market will last forever or you will lose money. Don’t anticipate a permanent bear market either, because this does change.
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Expect overcorrection when the market overshoots
Always remember that any excesses in one direction will eventually lead to excesses in the opposite direction too. Fear gives way to greed, but the latter can also be a precursor of the former. If you are tuned into the markets, you will be able to face the music when the market overshoots and consequently over corrects in the long term. Constant vigilance has its rewards.
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Don’t be swayed by the herd mentality
If you go along with the crowd, you will falter at the markets. The need to be an independent thinker in the markets is imperative if you want long lasting financial success. Getting swayed by the opinions of others especially newspaper reports and market programs will lead you wrong, because by the time markets make it to the news, a reversion is on the cards.
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Invest when you are rational
Human emotions can stand in the way of successful trading. A disciplined approach to investing is the way forward and the science of mastering trading mind traps or neuro economics is the latest step forward for market success. Emotions can blur the lines between illusion and reality. Rely on actual numbers and facts rather than emotions, if you want to make money in the long term.
Conclusion
Trading mind traps and herd mentality are the biggest pitfalls for those investing in fundamentals. They can be real roadblocks to financial success. Planning for a productive future involves knowing your numbers and their economic implications. It also involves a fair amount of independent thinking and initiative to beat the markets. Whether you are opting to follow the trends or go against them, will be the deciding factor in lasting success in the markets. So, stick to the mantras provided by financial gurus yet dare to think differently, for the markets are as dynamic as they are rational.
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