Stock market distractions can be very tricky. They can divert our focus from important to non-essential things. So, experts advise people to learn to distinguish between the noise and focus points.
It is not difficult for beginners to lose track while dealing with stocks. Being aware of the potential distractions can keep the person on the right path. What are the distractions? Let’s read more.
People who know less about the stock market might picture it as a crowded and noisy place. In the good old days, traders used to shout at each other to attract attention and book trade.
Some people might even imagine stock investing as thousands of random numbers (price data) turning from red to green in no time.
Presently, technologically modern trades happen in the stock market. Trading is silent with minimal human contact. How? Because all trades get executed online.
Moreover, when we are talking about stock investing, it is different from trading. Stock trading is not the same as stock investing.
- Trading is not investing.
- What is stock investing?
- Do not let Mr. Market drive your decisions.
- Focusing on the competitive advantage.
Stock Trading is Not Investing
Professional stock traders rely more upon fast computing and on the latest price data (tuned to few milliseconds). The idea is to take advantage of the speed. A speedy buy/sell order gives an edge to the traders.
Some people have made a living out of stock trading. Their trade mostly lasts only for days. In most cases, they rely on day trading. But this is not how investors like Warren Buffett, Peter Lynch, and Jack Bogle invest their money. [Here are few suggested books on investing]
My words might be sounding like I’m discouraging stock trading. Why? Because of the following two reasons:
- First: trading is costly than investing. How? Because while trading, one puts more numbers of buy and sell orders per unit time. Every time a buy/sell order gets executed, associated costs like brokerage, taxes, and duties, cess, Demat charges also becomes payable.
- Second: stock trading is not as tax efficient as investing. In 2008, LTCG was imposed (@10%), else long-term investing attracted zero percent taxes. A short-term capital gain (STCG) tax of flat 20% is applicable. Stock trading attracts STCG
I once heard someone saying that without learning stock trading, one cannot become a good investor. That is not correct. Trading and investing are two completely different ways of investing in stocks. Like there are two types of professionals, pharmacists, and doctors, investors and traders also serve two different roles.
Stock investing is more like running a marathon. The runner (investor) must have a mindset (thoughtfulness), stamina (intent), and strength (money) to run the full course.
One of the major stock market distractions we must learn to avoid is day trading.
What is Stock Investing? Buying A Business…
If the investment is not about buying and selling stocks, then what is stock investing? It is about purchasing a piece of a business. As running a business needs business-acumen, investors must also think like a businessman. It is necessary to do it to identify and buy stocks of good companies.
Investor thinking like a businessman, is it a fair requirement? Yes. How? It must start with reading financial reports of companies. The overall idea is to know how the company is making money and whether it has a MOAT (competitive advantage).
The procedure of reading, analyzing, reports of a company is a long-drawn process. Speed is not the requirement, but detailing is. Fundamental analysts can spend several months on a company before deciding to buy or not buy its stocks. If these tasks are done speedily (like day-trading), it will yield wrong results.
People must buy stocks like they buy a gadget (mobile phone, TV, and furniture). How we do it? Online research, comparison, store visits, and above all, price-consideration. Furthermore, do we buy an iPhone to sell it the next day? No, we will hold it for the next 2-3 years at least.
So, all these efforts are intending to hold stocks of a company for the long-term. Whenever an investor has such intent, he/she will think to buy only fundamentally sound companies.
Do Not Let Mr.Market Dictate Your Investment Decisions
The market (Nifty / Sensex) will go up and down. Nobody can preempt it. Hence, experts do not consult Mr.Market in day-to-day life. Listening to Mr. Market too often can cause too many distractions. Better is to focus on identifying healthy businesses for investing in their stocks.
Individual stocks may or may not replicate the performance of the market (Sensex or Nifty). The idea behind buying undervalued stocks of a healthy business is that they will continue to grow no matter how good or bad Mr. Market is behaving.
But I would also like to add that it is Mr. Market which gives us our buying and selling opportunities. How?
Mr. Market tends to overreact to short and mid-term news. For example, when steel prices go down, the stock prices of steel companies correct dramatically. What triggers such corrections? A fall in global steel prices, which in turn is caused by weak demand.
But when the prices are falling, it does not mean that henceforth, the world will start consuming less steel. The current price-fall is only a temporary phenomenon. The cycle will reverse soon. Mr. Market probably does not understand this logic and often overreacts to both good and bad news.
In a way, it is a good thing. How? Because Mr. Market reacting to the bad news about a company can bring its price below its intrinsic value. It gives us a buying opportunity. The reverse is also true, which eventually provides a selling trigger. Read more about goal-based investing.
Focus Point – The Competitive Advantage of Business
What is the most important number for any company? Net Profits (PAT). That is the reason why analysts give so much attention to the company’s PAT and EPS numbers. Analysts try to understand how a company is generating the reported profits. Understanding present earning helps to gauge future profits.
Attention on net profit (PAT) is good, but there is something better to dig deeper. What is it? It is called the ‘competitive advantage’ of the company. Warren Buffett calls it The Moat.
What is Moat? Moat is the ability of a company to hold its dominant position in the market. How they do it? By providing something unique in its products and services which their competitors cannot offer.
No matter which way the world economy is going, no matter what CNBC’s of the world is recommending, MOAT companies are always the best for investing. They may face some problems in the short-term, but over time they will be winners.
Suppose you are a space traveler (an Investor). You know that in space you will face rough weather, no matter what. It is unavoidable. But there is something you can control. It is the quality of your spaceship.
Get on board a spaceship that is spaceworthy. The space worthiness of the ship is a symbol of the competitive advantage of a company. Irrespective of any troubles, the spaceship/company will continue to travel in space.
No matter if you are flying a spaceship made up of paper or otherwise, space will through its tantrums your way. It is also true that the ship will have to face obstacles that are beyond your control. But what is in your control is the spaceship in which you are flying (the company).
A strong spaceship with a powerful engine will go a long way. Stock investing is like that. Investors must make sure that they are riding the right kind of company.
In the stock market, you will hear more stories of failure than of success. Why? Because people start on the wrong foot caused by stock market distractions.
The most common mistake made by people is trading in stocks, thinking that they are investing. People also get it wrong when they try to buy/sell shares by judging future market movements. Nobody can predict future market movements.
So what is the right way of investing in stocks? The right way is to identify strong companies that enjoy competitive advantage (MOAT), and then buyingit’s stocks at undervalued price levels.
Preventing oneself from getting distracted by the noise created by the market elements is also not easy. The easiest way is to keep oneself from watching the market news and not reading the daily recommendations. Find your way to analyze stocks of companies.
Next: Understanding a Company >>