On paper, optimizing your stock portfolio seems easy enough. In fact, you’re probably following some sort of formula to pick stocks for your portfolio.
Follow a few basic principles, asked your friends, watched/read some recommendation, locked your money and next day your picked stock become top gainer.
In reality, it’s not this easy.
My experience has taught me that it’s hard work to create a sound stock portfolio.
There are principles to follow, sure. But there’s also a lot of information you need to gain before you can build your dreamed portfolio.
How does the stock perform in past?
How does the market treating the stock?
How did you find that particular stock?
Does news headline grab your attention to XYZ stock?
What tools and resource are they using?
What’s going to make that stock a multi-bagger?
That final question—what’s going to make them give you excellent returns?—is the most important one.
Do you want to know – what I really care about when it comes to building a sound portfolio?
I just want positive overall performance. It might possible that 2 or 3 stock gone negative but the overall performance of your portfolio would be positive, that too with great margins.
According to the studies, “93% of retail traders are losing their money in stock market”
Let me get to the point.
Here are some stock picking tips and tricks
I’ve had immense success with these tactics and that can help you get great stocks for your own portfolio.
This might look simple but are worth trying. Sometimes doing small things in an extraordinary way can lead to extraordinary results.
#1) Keep it Simple
Well said: Simplicity is the best policy.
What’s true in life is true in investing too.
Your Stock portfolio is not an exception.
The simpler, the better.
As a retail investor, keep a stock portfolio of 8 to 10 stocks. And if you’re good enough to pick excellent stocks then 4 to 6 stocks would be best.
The idea is: if you’re 99% sure that this half dozens stock (from 20 filtered stock) will outperform the market then why would you waste your money for the opportunity cost of getting more returns in the same duration of time.
Also, its too confusing to track 50 stocks at a time. When to buy? When to sell? When to hold? Where to invest?
It’s too confusing to manage bundle of stocks.
I too have a concentrated portfolio of 8 stocks. No more, no less.
Here the crux: Keeping more will reduce the return & Keeping less will increase the risk. So as per my opinion, a portfolio of excellent 6 to 8 stocks is the portfolio that outperforms.
#2) Use the Six-ratio rule
You don’t need to waste your time analyzing each and every stock for hours. Juts what you need is 5 minutes to conclude “whether XYZ stock is worth giving time or not?”
This is the default Screener.in stock screen:
And this is the customized screen of my screener account:
You can figure out some extra metrics added in the screen, that’s what help me to decide whether the stock is worth giving time or not.
These tactics are very much helpful to save time while you analyze a stock.
Of course, you can choose your own ratios. If you prefer companies that give 20% of earning as dividend then customized this ratio in the list.
#3) Never dump your money in top buzzing stocks.
It’s a great barrier to become successful investors. They normally invest in the stocks which are in trending talk. Step out of this internet world and then think as you’re investing a business, not in a product known as the stock that goes up and down on daily basis. This would help you to conclude perfect unbiased conclusions.
Also, consider asking yourself below questions:
Do I like the stock just because it has fallen to its 52 weeks low?
Am I biased towards this or that stock just because I’ve spent ten days researching it?
Am I impressed by just the company’s recent performance?
Do I like it just because I heard 2 or 3 positive news on web or channels?
When I started investing, I was highly excited for making fortunes but it all disappear after understanding the real world of stock market.
I keep myself up-to-date with latest news and announcements.
In just a week I created a portfolio of 6 stocks and to know, all from Nifty50.
Then I figure out the whole scenario. What the heck I’m doing? How can I make fortunes by investing in stocks which are preferred by many? If it is the real way then most of the population would have make fortunes out of the market, as 70% of the total traded volume occurs in large cap.
Then again I optimized my portfolio and this time bought some excellent out-of-stocks which are not currently highlighted but are fundamentally strong and people will be dying to buy it in future.
#4) Never stuck with your computer/mobile screen
I don’t know about you, but when I first started investing, I keep checking my bought “stocks” about 20 times a day. It was exciting to see that the stock was increasing (even if only a teeny bit).
Same applies vice verse. A drop in the price ponders my heart at a high pace. That movement when I realize that I’m just losing my money for doing nothing but seeing the screen where the price goes up to down and down to up.
And it really hard to see your stock price going down and down and down and also that gasp when price rise.
But if you know that aversion of losing money is more than gaining from the stock market. That’s why you either end up panicking or losing your hard earned money.
#5) Try not to sell off your stock in one year of buying
Many investors are not even aware of the taxes that government charged from you on the profit you made on your investments.
Of course, you might be earning a lot but it’s better to earn more than your existing earning.
If you sell your stock in 1 year, the government will charge you with 15% tax on profit. So if you made 1 lakh, government will take 15,000
And if you sell it after 1 year, tax rates are 0.
Now it’s understandable – which is the smart move?
#6) Stop digging when you find yourself in a hole
An uncle of mine once bought a huge amount of shares of Jaiprakash Associates.
He bought it 3 years back when it was quoted at 100 INR and now it’s trailing around 8.
Why didn’t he sold out it stocks when he found it going down?
Interviewing him a bit gave me a good conclusion. Here comes an emotional phenomena…. step by step.
When a stock goes down to 75 from 100. The though came in his mind was – “I’ll wait until it again gets recovered”
When stock goes down to 50 from 75. The thought came to his mind was – “I’ll wait until it again get recovered, otherwise my 50% investment will get lost”
When stock goes down to 25 from 50. The though came in his mind was – “I’ll wait until it again get recovered. I already lost 50%, lets bet other 50 too. May be possible that it may go up”
Now when stock is trailing around 8. He may be thinking – “What the heck will I get by selling this crap? let me retain them and wait for any miracle”
At every downside of stock, his “emotions of losing money” and “hoping that stock may go high” conquer his decision. Instead of relying on vicious circle of advisers, brokers, pro investors etc, he would have rely on financial data of company.
I would also like to share one of my mistakes I made on betting stock of Tree House (sometimes I also react like a dumb investor)
Yeah, exactly. You’re right at your place but according to me, it’s a good news because I saved myself from losing more 10 Rs per share. I didn’t act like my Uncle acted in the case of Jaiprakash Associates.
This behavior is termed as loss aversion, well explained by Robert Hagstorm in his book “The Warren Buffett Way” :-
“The downside of an investment (a loss) has a greater emotional impact than the upside. This fundamental bit of human psychology is known as asymmetric loss aversion. applied to the stock market, this means that investors feel twice as bad about losing money as they feel about picking a winner”
Side note – Consider reading the above-stated book.
#7) Be greedy when other are fearful and vice verse.
I was always in benefit for following this advice.
I tried it with Tata Steel when it hit by BREXIT – Brexit Fallout: Don’t stay out of market
I tried it with ICICI bank when it hit by NPA – 3 Effective Ways To Double Your Portfolio
Recently, I tried it on, HCL tech – HCL Tech at its 52 weeks low: Is it a great buy?
This technique only works with BSE30 or NSE50 with some exceptions because these stocks are in the index which is representing INDIA. So high chances are they would be the best companies with good management. That’s why these companies 99% recovers their problems shortly.
#8) Work empty stomach.
The hunger hormone, known as ghrelin, can activate the brain’s hypothalamus and hippocampus, allowing you to research better, faster, and more effectively which is well explained by NY times.
Working just after you had ate 2 plates of pizza will make you lazy which in-turn stops you from researching with due diligence.
The purpose is that you need a fresh mind to judge a stock.
This frequently happens to me. I analyze some stocks and put them in watchlist for further processing.
Next day at morning, I feel like what made me putting this stock in watchlist? ending up removing it from my list.
What I want to point out is that you need a proper sound mind to judge a stock. And lacking this may result in discrepancies in your portfolio.
#9) Do deep research
There are many information available regarding companies, More you go deep into it, more you’ll get a clear view on the company and which will create a sound base for your investing decisions.
Here’s an example showing why there is need of deep research to reach a conclude best decisions.
The difference lies with standalone and consolidated values. Lycos have many subsidiaries so its income from its subsidiaries is very high. It has very less income from its core operation.
That is why there is the difference in PE and PBV and that is why you need to do deep research to conclude perfect decisions.
#10) Learn from other’s mistakes
Its good to learn from the mistake but its better to learn from others mistake.
You, me and everyone in the market make mistakes. Its an element which arises out of arrogance and no one can become full non-arrogant. SO risk is always there with every investment. However, one can reduce risk by using the approach of Margin Of Safety as explained in Intelligent Investor by Benjamin Graham.
Also well stated by Buffett partner Charlie Munger – You don’t have to pee on an electric fence to learn not to do it”
Learn it from others. I mean from Chatur (3 idiots)
Here’s the crux – It is easier to stay out of trouble than it is to get out of trouble. To stay out of trouble, just do the right thing at the right time. To stay out of trouble, you need a lot of money and a lot of legal talent, and even then, you may end up serving a lot of time.
Now just do one thing – find out what mistake successful investors did in past and learn from it.
“How can I find their mistake?” – you might ask.
Find their writings and read it all up. Like, read annual letters of Berkshire Hathaway written by Warren Buffett. You can peak more than enough mistake he did in his whole career.
If interested, buy or borrow this ebook of the collection of all BH letters from the year 1965 to 2015.
#11) Set Timer
Google is a company with every necessity. Have you heard about Google timer?
I use it every time when I analyze any stock to keep myself bound with time management.
Don’t waste your time for just analyzing stocks a whole day. And if you’re not able to analyze that stock then the chances are either you’re not good at analyzing stocks or company is not investor friendly as the proper information is not available for retail investors on the web.
What you need to analyze stock fully is just 45 min (generally, it took me 45 minutes to analyze a stock).
But before you burn your 45 minutes you should mark this words: It just took couple of minutes to decide whether this XYZ stock is worth giving time which I had already explained in this blog-post as follows:
You don’t need to waste your time analyzing each and every stock for hours. Just what you need is couple minutes to conclude “whether XYZ stock is worth giving time or not?”
Rest follow the “five ratio rule” explained above.
#12) Last but most important.
Real success is not measured by how much you earned instead how much people love you. what made people made about you. So keep helping others and yourself stay happy even at the times of market downfall. It’s where the real meaning of life exist.
“Money to some extent, sometimes let you be in more interesting environments. But it can’t change how many people love you or how healthy you are”