ast week, when the Sensex crossed 6700, a friend predicted that it would go to even greater heights.
And so decided he was not going to sell his shares till the Sensex touched 7000.
Though it looks like the Sensex is inching close to that magical number, it is a dangerous stand to take.
Don't get me wrong. I am not against investing in the stock market. In fact, I think every investor should put at least some amount of money into it.
Specially now when interest rates on deposits and bonds are on the downturn. The stock market gives the highest return from any other investment.
I am definitely a stock market investor. But, having burnt my fingers a considerable number of times in the market, I have learnt to be cautious and not greedy.
Let me explain why.
No one can time the market
All the advice dished out on stock market investing sounds great in theory. Buy low (when share prices hit rock bottom) and sell high (when they soar) is a surefire way to make money in the market.
But frankly, who has a clue as to when the stock market has touched rock bottom or has peaked?
Even if someone confidently looks you in the eye and swears that the Sensex is going to soar to even greater heights, there is no way you can know that for a fact.
The stock market is a creature in and of itself. Deciding when the bull is going to turn into a bear is anyone's guess. No one can predict the exact date when the overall sentiment will turn negative and share prices will start dipping.
And, for every one prediction an individual makes which is bang on, he probably has another 10 wrong ones to his credit. Now I am not saying that this is a scientifically proved statistic but I think you got my point.
Take my friend's case. He is eagerly waiting for the Sensex to touch 7000. What if it does not and comes down to 6500? What if it reaches 7000 and he is told that it will at least touch 7200?
Always have an exit price
The problem in investing in shares is that when you see your share price rising, you don't want to sell. Greed takes over and you always hope for a higher price. So you keep waiting and waiting. How I missed making a killing in the market brings this out so well.
And, should the market suddenly tumble, chances are high you will panic and sell and probably lose out too.
The trick is not to depend on the market movement to sell your shares. Forget where the market is heading. Think individually about your stock.
Remember, stocks and not the stock market creates wealth.
Fix an exit price and when your share reaches that, sell.
How to sell your shares to get the best deal
I have devised a simple formula for myself which I follow to ensure that I make a reasonable profit.
When I own some shares of a company, I divide that lot. Say I own 100 shares of a company. I break them up into lots of 25 each.
When the stock makes a 20% profit, I sell the first lot.
The next lot of 25 is sold at a 30% appreciation.
Now that I have made a profit, I play a little more dangerously.
I wait for the share price to appreciate by 50% before I sell the third set.
And finally, I keep the last lot for the kill. I don't sell those till I make a 60% profit.
Now, if the price goes up after I sell my first lot, I still have shares to sell at a better profit. If the price drops after I sell my first lot, at least I made a 10% appreciation on some of the shares.
Or, if you want to play conservatively, change the parameters. For instance, if you have 100 shares, you can sell 30 when you get a 10% appreciation, 50 when you get 20% and 40 at a higher rate.
This method helps one ride the ups and downs of a market and also avoid mistakes like selling all shares at the wrong price.
As for buying shares, I have to agree with Bhavesh Bombaywala who is of the opinion that it is too late in this bull market to buy now to reap gains. You can read his views in 5 rules when buying stocks.
Stay emotionless
Once greed and fear get a grip of you, the stock market becomes a dangerous arena to play in.
Don't let greed get the better of you.If you let that happen, you will never sell your shares. You will just keep waiting for the share price to go higher.
And yes, once you sell don't look back in regret if the price keeps zooming. Be happy with your profit.
For some reason if the stock prices come down, don't sell in panic. Wait for the stock to bounce back. Avoid using the stop loss concept which is advised my many people. The theory is that you should sell quickly to avoid losing more money. If you continuously follow this, you will get habituated to making frequent losses.
Finally, don't hold back with the excuse that you don't know where to invest your profits. If that was truly the case, you might as well keep your shares in the market and don't touch them for the next 10 years.
Note: These views and the strategy mentioned reflect the author's personal convictions. They are not a sure-fire way to make money in the market.
