When people were forced to work from home due to the Covid outbreak, they had extra time to conduct the necessary market analysis, which is how stock market investing as we know it today gained insane traction. Here we go about debunking some of the myths surrounding stock market investing in light of current market dynamics and the urgent need given that careful stock selection can yield returns that outperform inflation:
Buy quality stocks and leave them alone
Even if you have a knack for selecting quality stocks, there is no reason to hold onto them for all of time. Due to the change in time, you must adjust your investments as necessary or you risk being left helpless. This is said because it occasionally happens that successful companies with a sizable market share fail to realign their businesses and fail. You must therefore exit your positions at the proper time, just as you try to time the market and want to buy the scrip at the right time.
Purchase shares of companies whose brand value you are familiar
High brand equity does not guarantee that the stock will continue to rise and generate gains for your stock portfolio. The stock of IRCTC, which is a widely used service nationwide, can be a straightforward example even though the stock has been tanking steadily. IRCTC is currently trading at a discount of more than 50% from its 52-week high price of Rs. 1279 as of the time of this copy’s writing. This discount dates back to the time of the stock split and follows the price adjustment.
Invest in businesses that pay out high dividends
Dividend-paying businesses can undoubtedly contribute to some stability during challenging times. However, relying solely on stocks that pay dividends is never a smart move. We invest in stocks over time to build wealth and achieve our long-term financial objectives. It may occasionally be a trap if, for example, a stock has no growth and only uses yield to make up for the loss of growth.
Invest in businesses with high ROCE
We consider the past returns of the business, often in a manner similar to mutual funds, and may then attempt to cherry-pick. Therefore, it is also not guaranteed that a stock with a history of strong ROCE will perform well going forward. Additionally, it is possible that businesses that did poorly on the metric in the past due to a pertinent strategic change will now perform better despite having low RoCE in the past.
Stop loss in investing
Stop losses are strictly used to limit or reduce losses. For example, let’s say you invest in X Company at Rs. 100 and set a stop loss at Rs. 60. If the stock drops to Rs. 60, your positions in the stock will be reduced, limiting your losses or downside. However, it’s important to note that stop loss investing is for bettors who take on high risk and make aggressive bets. Stop loss investing is not judicial for people like you and me who are content with a moderate profile. Furthermore, stop loss application is something we do when trading.
