How you can eliminate risk from your investments in stocks
If you’re at the point in your life where, you’ve started to make some money and now have some excess lying around waiting for you take the leap and invest it, then this article will resound with you.
At this juncture where you stand, there are multiple routes that you can take, all of which lead to one or the other form of investment. But the obvious question is, which one do you take?
In the hopes of making this decision process easier, you go looking for advice. You go to elders, peers, and of course, the internet. And no matter where you go, you’ll end up seeing a common pattern in the advice, which is, almost everybody will break the investments into two categories, risky and not so risky. And almost everyone will say that one of these investment options is riskier than the others, and the candidate deserving of that title is, stocks.
So, the question arises: Why are stocks considered to be one of the riskier forms of investment?
Where does the risk come from?
Let’s start with the example of flying. The simple proposition that one can put humans, valuable cargo, in a metal container and send it shooting across continents at tens of thousands of feet above the ground and at mind bending speeds, seems preposterous and filled with risk.
But, right this second there are thousands of aircrafts in the air, doing just that and it’s highly likely that all of them will make it to their destinations, safe and sound.
So, how did we as a race, take this idea that sounds so stupid and then turn it into one of the most practical and safest forms of travel?
The answer is simple, through knowledge.
After spending years, understanding the working of aerodynamics, wing designs, and a million of other things, we gained enough knowledge on the topic to understand the risks, benefits and how things worked to trust our lives with it.
As you just saw, how by simply understanding the workings of something, it was transformed from something risky and unviable to practical and indispensable. The same is true of investing in stocks.
From a layman’s view it’s all scary and risky, but from the perspective of a person with slightly more knowledge, it’s a land of opportunities.
When you invest in a stock without the knowledge of how and why it’s price moves or it’s demand changes, you’re essentially turning your opportunity to make an educated choice into a blind bet. And as is the nature or all blind bets, you’re leaving things exclusively to chance and at the same time creating a situation where you don’t have any control. So, at this point everything starts to seem risky and uncontrollable, building a case against investing in stocks.
How can you eliminate this risk?
If you’ve learnt anything from everything you’ve read above, you’d know that the answer is: knowledge. By simply researching a company’s past performance, future growth estimates, and how the current value of the price reflects all these, you can decide if it makes sense for you to invest in it.
Now, let’s compare this with another approach to investing in the same stock. You, happen to come across a piece of news talking about the company launching a new product, which has created a lot of buzz with ads, etc. So you just decide to dump a whole lot of your money into it’s stock. Why?
Because the company is about to launch a new product?
Do you know how this product differs from it’s competition?
Do you know if it has the potential to beat the competition?
Or do you know if you’re patient enough to stay invested for a couple of years, because that’s how long it takes for a company to benefit or loss from the performance of a product?
A person who chose to invest via the second route would answer these questions with a majority of Nos. If that’s the case, then I hope you realise how stupid this investment sounds, because, with practically no knowledge on the stock this whole investment has been turned into a blind bet. So, if the price of this stock goes up or down after a while, the person who invested with the second approach wouldn’t know why the stock is performing the way it is. If the price moves up, they’ll just think they’re lucky and if it moves down, they’ll call the markets risky and leave.
To successfully eliminate risk, you’ll need to have two things-
- Knowledge
- Patience
Knowledge-
No matter what website or app you use to monitor stocks, it’s highly likely that it will have the financial statements of the last few years on that stock. Use these to understand the trend in the company’s performance, if it’s been on a decline or an incline.
There are many metrics that are calculated from a company’s financials which can tell you everything from how much money the company is making from every rupee invested in it to how much the stock’s price is inflated compared to how much it should really be worth. More on this in an article later.
And also you’ve got the news, old and new, on a company to get a gauge on how it will do.
Once you start investing with all this information, there’s no going back.
Patience-
Patience is just as important as having knowledge. In a bad economy and a good one, there’s only one winner, patience.
With patience you’ll always find the second best time to enter into and get out of an investment.
Second best?
Because, every time you buy a stock you’ll see that in the near future it’s price will always fall to a more tempting price, and every time you exit an investment, it’s highly likely that the price will go slightly higher, again, making for a more tempting opportunity.
But, the real wisdom lies in accepting that you will almost never be right about when to invest, as nobody knows what’ll happen in the future.
And the second reason why you need to have patience is because if you, based on your research, have identified that a company is strong and hasn’t yet received the investors’ attention, then, stay put. Because, every strong stock has its day of reckoning.
Take a look at the Titan company’s stock, arguably a strong stock, below.
After it’s price stagnated at around 50 in 2008, being a strong stock, after a few years it got the investors’ attention and shot up to reach a price of five to six times it’s price in 2008.
And then again, in 2015, after stagnating for a few years, it price shoots up to the thousands, ending at 1500 right now.
See what I mean?
Staying invested for longer in a strong stock gives your astronomical returns, making the small fluctuations in the short term price seem inconsequential.
The same is true of down trends, if a company has been doing very badly, then the investors, over the long term, reduce their interest in that stock by reducing its price.
The point being that, even when the price starts to fall, in most cases, it happens over the course of years, so you’ll be aware of this trend at it’s onset and can exit the investment.
It doesn’t take a lot to beat risk
so the next time you go evaluating stocks to invest in, make sure that you aren’t just going behind the hype and you’ll be golden.
You’re part of an exclusive club now
Not many people have a clear idea about all the things that you just learnt about and that too at your age, assuming that you’re relatively young.
Now, empowered with this knowledge, you’ll find your self cruising more effortlessly through the financial part of adulting than your peers.
Which brings us to the most important responsibility that all members of this club have, that is to educate people around you on financial literacy and give them the same gift of empowerment that you have received.
Why does Let’s Talk Money exist?
To empower you.
Because, we understand the impact that the knowledge of a new tool or skill can have on somebody’s life.
And, financial literacy is one of those tools. It holds the potential, if harnessed, to change the entire course of a person’s life. Which is why we are working towards making the conversation around it more fun and engaging so that we can empower as many people as we can.
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