So you want to invest in shares in the Nepalese stock market. You might have already calculated how much fund you’re going to start with. But the question is, how do you start? Like every game, the game of investing has a set of strategies. Which strategy should you choose and why? Is one investment strategy superior to another? You’ll find out.
I have already covered the process of entering the Nepalese stock market in previous articles of this series. The guide includes everything from opening a Demat account to depositing collateral to your broker’s office. Make sure you check that out here.
In this article, we are more concerned about the investment strategy, not the process. For example, buying and setting up a chessboard is the process, but it is not what makes you win a chess game. To win a chess game, you have to learn a strategy.
Ways to Earn Money in the Stock Market
No matter what strategy you follow, there are only two ways to make money in the stock market.
1) By buying stocks when they are cheap and selling when they are expensive.
If you buy a stock for Rs. 250 a share and sell it for Rs. 500 a share, you instantly have a profit of 100%. Buy low, sell high. That is the mantra.
2) By investing in stocks of companies to get their dividend.
On the other side, you may invest in stocks to profit by getting the dividend that the company distributes every year. A dividend is simply the annual payment made by the company as a reward to investors for investing their capital.
Generally, short term stock traders do not care about the dividend because they have a very short timeframe. Dividend gains are mostly expected by long term traders, fundamental investors, or value investors. More about these terms later.
Choosing an Investment Strategy
There is nothing called a superior strategy or an inferior strategy. All strategies work, otherwise, why would people still have them?
Investing in stocks is so much like buying clothes. You do not necessarily want clothes that are beautiful, you want clothes that make YOU look beautiful. A shirt that suits your friend may not suit you because of the size, the color, and myriad other reasons.
An investment strategy works the same way. A strategy that one investor loves may not prove beneficial to you. People have preferences, and some strategy favors these preferences over another.
Does this all sound confusing? It’s perfectly okay. Now, you will learn about the three most popular investment strategies that suit the Nepalese stock market.
Strategy 1: Fundamental Investing or Value Investing
If you thought investing meant reading long financial reports of companies and evaluating their quarterly performance, you were thinking about fundamental investing.
Students of fundamental analysis do not have to analyze every company on the stock exchange every day. They have to sort a handful of companies whose fundamentals look promising. They then filter the companies to find out the best-performing company among them. In my personal opinion, you do not have to invest in more than 4 or 5 companies if you look at company fundamentals. At any given time, there are only a handful of companies that perform at the top of their category.
Fundamental analysts know that behind every stock is a company that does business. The role of a fundamental analyst is to find out what business the company does and how good it does it. This involves studying the company’s historical performance year after year, researching the demand-supply mechanism of that particular business, and the competence of the management.
In fundamental analysis, there is no list of things that you should check about a company. Hundreds of factors determine the profitability of a business. Our role is to incorporate as many factors as possible to get an estimation of where the company will end up in the future.
Value investing is a peculiar branch of fundamental analysis introduced by Benjamin Graham and popularized by Warren Buffett among other contributors.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than what they are really worth. This requires you to find out things about a company that no one knows. Since the price is still cheap (others do not know about the competitive advantage of this company yet), you buy at a cheap price. When other investors finally recognize the company’s edge, they will take price higher and you will benefit from your early investment.
Value investors are required to not only study past performance but also speculate on the company’s performance in the future.
However, this automatically means you have to go against the crowd. Thousands of investors will have created a price equilibrium at any given time. But if you invest in the company as a value investor, you are betting that the company is worth more than what all other investors believe it is. You are defying conventional wisdom. This is why I personally believe it is hard to go against everybody else and still be right.
But it is not impossible, guys. Often times in the stock market, everybody is straight wrong. I repeat, everybody.
Strategy 2: Technical Analysis or Stock Trading
If fundamental analysis is like marrying a girl, technical analysis is like taking your crush out to dinner (and more. *wink, wink*).
As a technical analyst, you care very little about company fundamentals and its performance. In fact, technical analysts do not have to know what business the company does.
The stock market and stock price is governed by demand and supply as much as they are influenced by intrinsic fundamentals. Greed and fear drive the stock market as much as quarterly reports and company management.
As Benjamin Graham famously said, the stock market is a voting machine in the short run and a weighing machine in the long run. Your work as a technical analyst is to capitalize the votes in the short run. In simple words, your work is to find out trending stocks and get on the boat while everyone else seems to be doing so. Obviously, to profit from this journey, you will have to exit when everybody is exiting or earlier.
Technical analysts speculate on short term stock prices by looking at the company charts, trendlines, and technical indicators. The stock market is random and systematic at the same time. You can’t predict the next movement but you can speculate on the next series of movements by studying the series of the most recent movements.
Investing in stocks is like drinking from a tap. Your work is not to speculate when the tap will water but make sure you are there with a cup when it does. Technical analysis won’t make one a fortune teller. It just makes one skilled enough to recognize the sounds the tap makes before it begins to water. And that, my friend, is more than enough to profit in stocks.
Strategy 3: I-don’t-give-a-shit-and-I’m-stupid Investing
Both the strategies explained above work, they really do. However, some people, knowingly or unknowingly, follow this third strategy. This strategy does not work consistently in the long run. But this is also the most popular strategy that people follow at irrational times.
Irrational times is when the most amount of money changes hands. We are talking about big movements here; a primary trend reversal, a bubble burst, or aggressive buying. These are some examples of times when there is the highest profit-potential but also high irrationality in the market.
In the simplest of words, the I-don’t-give-a-shit-and-I’m-stupid strategy requires you to do as little thinking as humanly possible. If you have the urge to study company fundamentals or stock charts, don’t do it. If you have the tendency to invest your hard-earned money based on market rumors or a stock tip from a friend, congratulations! You are the master of the I-don’t-give-a-shit-and-I’m-stupid strategy.
If the market is bullish, you might actually profit with this strategy. However, it is not because your strategy worked. It is because the overall market was bullish and you entered at a lucky time.
If you want to sharpen your I-don’t-give-a-shit-and-I’m-stupid strategy, you should also invest everything you have in a single company, do not give a shit about putting stop loss, and try to beat the market instead of playing it. As a side tip, you should also invest only when you are overly emotional, like after a lucky win or a hard loss.
No matter what strategy you choose (we hope you don’t choose Strategy 3), discipline and consistency are the primary contributors to your investment success. No matter the years of experience you have or your successful track record, emotion has a devilish ability to take over your strategy. This is how many smart people can’t play the market for long.
Your job is to learn a strategy that works, control your emotions, and be consistent in your moves. The game of investing is simple: Be right more times than you are wrong. Profit more often from the stock market than you lose.