Avoid these 2 mistakes and become rich!

There are two big mistakes most investors make.

The first is following the crowd and not trusting their own intuition. Doing what everybody else is doing is often okay in the short run but in the long run it's usually wrong. Take five steps back and look at the big picture.

Is there a general market trend up or down? Has there been a shift in the trend? Are we really in a growth time frame or is this a time when companies are laying off people, having a difficult time increasing prices, holding off on capital investments, etc? What is your personal experience or experience of family and friends? What is your intuition telling you? You may believe that intuition has no value in investing, but how many of you knew the stock market was overvalued and yet in-vested because everyone else was making money and you felt left out of the game? Try to understand your motivation and create some belief of what the future is going to look like.

The second common mistake is not looking enough at history and understanding history and market valuations. People may understand the past twenty years at most, but they don't really study and understand the last one hundred years. You can see patterns when you're looking at the whole twentieth century. You look at the last twenty years and the stock market has done extremely well, but you look at twenty years before that and stocks did very poorly. So you have very long periods of time where the markets don't do anything.

History helps you see that. Markets tend to get greatly overvalued. You have extreme greed and extreme fear. What you see when you review long-term history is that when you have extreme greed, markets become very overvalued and bubbles occur, and, when you have extreme fear, markets become very undervalued - and, therefore, present a very valuable opportunity to buy.

It's very useful to understand these big cycles up and these big cycles down - what some people call regime shift. Ben Graham said something that was extremely valuable in his classic book, The Intelligent Investor. There used to be a belief - because of our traditional market allocation models and modern portfolio series - that you should hang in there for the long haul. Ben Graham, who is one of the best value investors of all time, said that in a normal 50 / 50 portfolio, when markets are greatly overvalued, you go 25 per cent in stocks, and, when markets are very undervalued, you go 75 per cent stocks.

You're really going against the crowd when you do that so it's very hard, but that keeps you from getting caught being greedy. You look at the markets and say, "Is the market overvalued or undervalued, and how much risk am I willing to take?"

In 1999, for example, valuations were very high, so it was time to start lowering stock allocations even though the share prices were still going up, and everybody was euphoric about the market. In hindsight, it certainly proved to be the right rule, but it was a difficult thing to do at the time. You want to be heavily invested when things are cheap and very cautious when things are expensive. You have to avoid saying that it's different this time and that markets are going to keep going up because of technology or whatever.

When you alter your strategy as valuations become very cheap or very expensive, do so gradually. In 2000, for example, the average investor in Japan had about 3 per cent in stocks, whereas the average recommendation in the United States had about 68 per cent in stocks, according to Barron's.

In the late 1970s, the average recommendation was between 25 and 30 per cent in stocks, and that was the time just before the beginning of the bull market. It just shows that we tend to see the very short past and not look at valuations and the big picture.

Major trends are very slow to change, so the investor doesn't have to do something every week. Once or twice a year is often enough to rebalance your asset allocation in order to reset it to your original allocation. Yes, it's very hard to take money off the table when things are going up, and it's very hard to add to equity portfolios when things are cheap, but this is exactly how you grow wealthy over the long-term.

A golden rule to remember is that greed and fear control the market in the short run. If you can understand greed and fear as the central short-term components, you can see what's going on and realize the pattern. Investment valuations at the time of purchase determine long-term returns. When people are more fearful, great values are created; when people are greedy, bubbles are created.

So, don't pay attention to short-term noise. It doesn't matter what the market does in the short run. You have to understand the basics - what's going on in the big picture - and not worry about missing some of the upside. In other words, let neither let greed nor fear hold you in their sway, indeed, it's in times of pervasive fear that great values are available.

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Stock Up On Essentials Of Equity Before Buying Stocks

Thinking of investing in stocks? Make sure you have the right attitude and know how to go about it. Here are some tips you must consider before trying your hand.
So you've made up your mind to invest in the stock market. Having overcome initial inhibitions, you're now looking to become a millionaire overnight. After all, if your friend A or your cousin B could do it, why not you?
For investment-innocents, here's a shocker: It is not where you invest your money, but how you invest it that decides the profits. That is to say, stocks are only as good as the investor; they respond to the individual's abilities and acumen. In that sense, stocks are quite distinct from consumer durables. You can reasonably expect a washing machine to perform as well for you as for your neighbour, but that is not the case for stocks, which are a different breed altogether.
So, instead of investment tips, here are some attitude tips.

Don't commit large amounts of money or short-term money.
Even if you can afford to take risks, we suggest you don't commit large sums of money-at least not in the initial stages. It would be wiser to start with small amounts and increase your investments as your confidence and grasp of the markets grows. It is not easy to pick up the right stocks or keep track of them when you are starting out.
Also, don't break FDs to invest in rising markets.
Always invest the surplus, money for which you have no immediate plans. Equity, as an investment, carries in-built risk and volatility and investing short-term money may force you to quit at the wrong time.
Do be sceptical of self-proclaimed experts.
As an investment ingénue, stay away from self-proclaimed experts or overzealous advisers. The so-called 'hot tips' they offer to investors are largely short-term trading tips, which are very risky for a retail investor. Because the reaction time is limited, chances are you will end up losing wealth.
Similarly, TV gurus and the like are forever ready with "buy" recommendations; few, if any, come out with "sell" advisories for your advantage.
Further, expert recommendations often have vested interests. Recently, market regulator Securities and Exchange Board of India (Sebi) fined an expert for acting exactly contrary to his own recommendations. To curtail such rogue elements, the market regulator is planning a law to govern experts, who comment on the markets in the mass media.
Don't trade for short-term.
Short-term trading or day trading is very risky and not recommended for retail and small investors for two reasons. First, it requires lot of time, which small investors can rarely spare since it is not their primary business. Second, retail investors may not have the necessary skills and tools required for short-term and day trading. Do not try to time the markets: it's one of the most difficult things to do.
Invest long-term in fundamentally strong companies.
Our advice to retail investors is to invest long-term in fundamentally strong companies. Give your portfolio adequate time to grow. Do not panic in technical corrections. If you are invested in fundamentally strong companies, you are safe. We saw two sharp corrections in 2006, first in May-June and again in December. On both occasions, the market bounced back and crossed previous highs because the fundamentals were intact.
Don't ignore stock fundamentals.
There is no set formula for fundamental analysis. You have to study various indicators like sectoral growth, company growth-both top and bottomlines-and various ratios like price to earning ratio, price earning to growth, dividend yield, book value, price to book value, price to sales ratio, debt-equity ratio, return on capital employed, to name just a few.
If number-crunching is not your cup of tea, you must still investigate the nature, business and size of the company and its growth in the last three years-sales, profit and earning per share (EPS)-all of which are accessible on the websites of stock exchanges.
Do not be tempted to buy small caps and penny stocks.
The risk involved in small companies is huge, but higher risk may not necessarily lead to higher gain. That is not to say that you should ignore small companies completely, but at the same time you must have solid reasons for buying into them. And when you do, make sure they are only a small portion of your portfolio.
To be critical of media reports.
It's tempting, when you are just about beginning to follow the jargon, to buy into glowing media reports about corporates. But they could be misleading. For instance, you may read of a company setting up a new plant. Such announcements usually push up prices in anticipation of earning growth.
Before you join the queue for their stocks, you need to understand the cost benefit of the new plant. Ask yourself a few questions: where is the money coming from-equity or debt? If it's equity, how will it impact the EPS in the near future? If the source is debt, is the company in a position to leverage the increased debt? What will be the gestation period?
When will the earnings really start coming in?
What will be the return on capital employed?
Don't follow other investors blindly.
People often talk about their success in the stockmarket, rarely of their failures. Your friend may have made money in the past, but there's no guarantee he will continue to do so in future.
If, however, he offers to share his stocks research with you, welcome the opportunity. It will help you build your own research, but remember it is not a substitute for your own investigation.
Do stay away from a large number of stocks.
Investors generally hold a large number of stocks in the name of diversification. But this may not always be the case. Harry Markowitz, known as the Father of the Modern Portfolio, warned investors: "Holding securities that tend to move in concert with each other does not lower risk." A truly diversified portfolio, he said, comprises non-correlated asset classes that could provide the highest returns with the least amount of volatility.
If you are still looking to diversify within equity, do not go in for stocks of more companies than you can track regularly. Seven to 10 would be ideal, though, of course, this is a highly individual call. The biggest disadvantage of holding a large number of stocks is failing to quit at the right time.
Stocks are only as good as the investor-they respond to the individual's abilities and acumen
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