Are You Fit To Be An Equity Investor?

Investor attention turns towards buying equity shares when the buzz in the markets increases. Celebrations around the Nifty reaching the 10,000 mark would leave many gasping at the possibility of becoming wealthy by simply picking up a few stocks.

My consistent message to eager investors has been this: Equity investing is tough. It takes a lot to be successful.

Do it only if you can persist, learn and persist even more. So what does it take to become a successful equity investor? 

First, to invest in equity is to invest in a business. You should have a basic interest in how a business works and how it struggles through various challenges and ultimately succeeds. The richest equity investors are those who set up their own business and spent the best part of their lives working towards its success. The value they build over the years reflects in the shares they own as promoters, managers and stakeholders.

Second, you should have the ability to put together a framework for growth of the business you will invest in. To do this, you should have training in financial analysis, or be willing to pick up the knowledge and skills required to understand how profits are generated and how the numbers come together. Every business whose shares you buy should be supported by an investment thesis, and you should be able to put that thesis down in words and numbers.

Third, you should have the perseverance to apply your framework on the potential stocks you could buy and come up with a shortlist. For example, you can have an investment thesis that says that you are looking at companies that are in businesses whose sales is growing at an even pace (plug a number), and whose return on capital invested is high (number here too) and the management is focused on growth without leverage or increasing costs (quantify these too).

Fourth, you should have the risk taking ability to keep your money in the a few picks that meet your stringent criteria. There is no point in buying stocks that are in the news, or recommended by friends or relatives, or picked off random conversations or lists from the TV or newspapers. When you do not know why you are buying, you will stake too little. When you lack in conviction, you will take no risks. Then you will end up with a long list of stocks.

Fifth, you should have the discipline to keep investing in the stocks you picked while also tracking their performance. Without a good understanding of the business and the numbers, and a robust investment thesis, you will not be able to make up your mind about whether to keep or leave the stock as its performance unfolds. Even the best investment mind cannot forecast the growth path of a business.

Sixth, you should have the mental framework of a learner who is willing to be caught having made a mistake. If you are the kind of person who likes to always be right or seek complete control of things in your life, or like the comfort of everything going exactly as you planned, equity investing is not for you. You have to be able to take active calls on what is going wrong. There is no knowing the potential upside of a stock.

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