5 tips to win the stock market

Either be very fast, or be very very slow. Any in-between rhythm and you stand to lose.

Why you need speed

In today’s world, winning the stock market, or at least having a fairly good return is the aim of everyone. Inflation rate is possibly at an all time high, and although the inflation basket has not increased that much, the prices of goods that we really want has infact increased many times. Be it rents, our mobile phone bills, the air conditioner bills and now, the necessary air purifier. Cost of living has undoubtedly been increasing.

It is therefore important to understand how to win. But perhaps more importantly, it is important to understand how not to lose. And lose you will. Why?

You see, all the big investors will tell you that you must wait 10 or 20 years for compounding to take effect. That is a very different ball game. Just buy the Nifty50 stocks and wait for 10–20 years. Obviously, you might need some stock swaps there too. But that is a different ball game, because:

1. You might be in need of liquidity.
2. You might have some short term goals. We all have. Such as saving for a car, or a house.

But then, for these short-term hauls, you can never win.

Because you need speed.

I will give you two situations:

1. You research the heck out a company. You know the growth potential of the sector. You see the management, they are all from top institutions and have had very great track record. Cash flows are good. You decide to invest. Only you did not know, and neither were the reporters able to tell you this, that a major institute investor is selling its stake in the company. Not just this, they also lost a crucial board member in the process and the company seems to be losing momentum in the next 2–3 years at least. All your search was futile. You did not get the full information.
2. You heard that a top institute was going to disinvest in a particular company that you have been holding stocks for the past 5 years. You were looking at a 10 year maturity. Now, what happened is the news only reached you in the noon. And the stock had already deflated by 5% since morning. Your returns are now showing a net 4% return from a previous excellent 9% return. You will need to wait at least another 2 years just for stock to be back on track. Information did not reach you fast enough.

It’s not that you cannot win. It’s just that information did reach you fast enough.

The tools that big players need to win

Bloomberg has built their empire on this fundamental idea that information should reach you first, the tool being the Bloomberg Terminal. It costs $24K/year per user approximately. That’s the price people are willing to pay for faster information.

Bloomberg is more of a news aggregator. And you may be following any such news sources. Twitter for example is one of the cheapest news source that you may follow. You may build a bot around to get alerted about relevant news source, could be a nice pet project.

Thirdly, have you ever wondered why in reality Technical Analysis is so popular? The first thing that they teach you in TA is that the bars/graphs carry all the information that there is to carry. Well, aside from the fact that the company has bad management, etc. But the point being, information can reach you very fast when you look at the price movement of the stocks.

Fourth, insider information. These are the secluded information away from the public, and if you can get your hands on such information, you can make huge money. Of course, on a lighter note, this is illegal but illegal until you get caught that is. But it is a tool nonetheless.

What should you do?

1. Invest in mutual funds: The easiest way out there. These of course do not guarantee the return that they promise, but they are very good investment instruments. One way to get good returns is investing in 2–3 different mutual funds, 1 being very high return (small cap), the other 2 being in large cap which returns say 12%. Overall, you will have more than 12% easily.
2. Learn technical analysis: The price often goes against our predictions and for good reasons. We do not know everything, but the market knows through information precipitation. Right. But this is the fastest information that you can get. The movement the momentum, combined with relevant information will give you the story.
3. Follow Twitter along with learning to judge the sentiment of the market: There are certain stocks/companies for which you will find good Twitter handles. However, take them with a grain of salt. People tend to dramatize certain metrics to get more engagement in their tweets.
4. Invest in sectors and not companies: Pick a sector, and invest in the top 3 companies in that sector. Sit and wait. How to pick a sector? Learn the trends in the country. For India, you can visit IBEF and so on, to learn the government initiatives and schemes. Or, in private sectors, certain sectors can see good consumer response say in the coming years.
5. Macroeconomic trends: Fundamental analysis is a narrative. It is the story management likes to sell to you. “Know us as an individual person, what a great person I am” and so on. And for you, it is like trying to judge a person from far away. Unless you absolutely know the stories, the nuances in a person, it is wrong to form an opinion about them. Same is true in case of companies. You should always bet on sectors/industries, not on companies.

On a related note…(in Indian context)

I believe it is essential that all the traders in this country learn to take a stance, stick by their decision, learn to trust their own decision making process. Today, the market is very volatile, because everyone is disoriented in the Indian market. The management of companies are disoriented because they do not know what the traders want. They simply put up a story, some figures and hope that people would invest in them because of the marketing effects. Now, companies are afraid to launch IPOs precisely because of such ill-judgements by the managements and analysts. The traders on the other hand are disoriented because they ride on momentum, thinking somebody else out there has better information.

As a trader, you need to hedge yourself against this fact that there’s better information out there. How? You bet on horizons, on trends, on sectors. You do not bet on months, or on companies.

Good luck.