Lessons learnt from Stock Market

Everyone at some point thought about it, but it is hard to generate the second income when your first income takes most of your time and energy.  I always thought of increasing my first income as much as possible, so that I do not need to look for the second source of income. This strategy worked out pretty well for sometime. But then something changed, it is either because I felt that I have hit a saturation level in my first income (at least in the current job), or I just need to look out for something that closely aligns with my passion and goals. For a minute, I thought I wanted to be a writer and be an author of a book. Sounds crazy to you?, it should because it is a crazy idea. It took me two months to write one page of text. So I decided, I am not going to be financially independent by writing books. I did not quit writing, but moved on to something else. Mainly because I realized this cannot be my medium to attain financial independence.

The thought of having a second income became stronger as year passed. I am not worried about failure, I just need a good investment idea as a second option. When the second option start to generate money, then it is a bliss. It does not mean it has to be a huge amount. Even few dollars a month will do. That will keep my hope and dreams alive and going.

I really did not had any hobby or a side project. At Least that’s what I thought about myself. But on close evaluation of my activity, I realized that I have been in the stock market on and off for a long time. It is more off than on, but still I was in the stock market from year 2002. I have traded handful of stocks for few years, hoping and praying that it will go up. After ten years, I realized that the strategy of hoping and praying does not work.  I have to admit that during the first ten years, I lost couple of thousand dollars to the market. There is a reason why some stocks are cheap and will remain cheap for ever. This lead to my first golden rule , Rule 1 - Do not buy cheap stocks.

Starting year 2012, my strategy is to buy undervalued stocks.  The timing worked out well, I had few  good stocks in mind, but unfortunately I did not had enough money to invest in all the stocks. I do not want to diversify my stock portfolio. Diversification guarantees a good average result, but not great result. I did not diversify my portfolio because it gives average result, but because i do not want to be average. I did my research and invested in couple of most undervalued stocks.I doubled in my major investment, and made decent return on other stocks.. Part of me was happy, but somewhere I am not satisfied. Mainly because it was not my intelligence that made money this time. It is more of my timing to enter the stock market than anything else. Nevertheless I need to add this lesson to my golden rule, Rule 2 - Look for undervalued(not cheap) stocks.

In the start of 2014, I reevaluated my stocks and my performance, and I reevaluated my dissatisfaction over the wait period for the market to realize the full potential/value  of the undervalued stocks. Then I realized my frustration was due to the wait period.  That is, when i am invested on a stock, the wait period locked the money for an indefinite period of time. It feels like you are taking a huge risk with the hope that it will go up someday without getting back any returns during that time. It really felt miserable at times.  Moreover, most company strategy is futuristic on paper, but without any will power to back that up. Their planning strategy reflect pretty much the same with their future financial guidance as well. It is very difficult to evaluate the worthiness of a company that does not share their profit to the investor. You can fake an idea, but not profit that they have to pay off to investors as dividend. Most companies are only interested in throwing ideas to get public attention and their corporate bonus, but little focus on implementing those ideas and see it come to life. Most MNC companies are focused on acquiring other companies instead of organically growing up their market share. This gave way to the third golden rule, Rule 3 - Invest only in undervalued stocks that pays dividends regularly. 

Due to the third rule, I rearranged my stock investment in such a way that I invested in undervalued stocks which will pay me quarterly or monthly dividends on a regular basis. This made my portfolio look even attractive. Suddenly I started to have a real second income. What started as few dollars every month, changed to few hundred dollars every month, and it feels great. The dividend money is used to repurchase other undervalued stocks. It was my decision not to reinvest the dividend on the same company. The reason is , stock investment should be a calculated and educated pick, and not an automated process.  This makes up the fourth golden rule - Rule 4 - Reinvest your dividend money.

Buying and selling stocks could be fun, but do not forget that you are playing with your life’s savings. Be responsible when doing so. Lets not forget that you are paying a commission fees to the agent through which you are running all these transactions. It adds up to a lot of money when you add them up over a period of time, but that’s not the main problem. What you need is more focus, and not distractions.  Few focused and targeted trades can get you the desired result. You don't need hundreds of trades to get your focus. An investor focus on stable and long term growth potential, and a trader focus on short term growth potential of his investment. This gives away the fifth golden rule. Rule  5 - Be an investor, and not a trader.

After becoming an investor or a trader, it is important to understand how to allocate the excess cash, or when to get out of a stock when the underlying situation changes. It can either be because the stock you owned become overvalued at this time, or the company is going through a management crisis. When the time comes to sell and reallocate the money, you need to know how effectively and efficiently you can put your money to work. A good amount of research about the company, management and finance, plus your gut instinct driven by your logical mind should be trained to allocate the excess capital in reinvesting the money for the long term. This gives way to the final rule. Rule 6 - Learn & master the skill to allocate capital. 

Last, but not the least rule - Have fun, and enjoy the game of investing.

Rule 1: Do not look for cheap stocks.

Rule 2: Look for undervalued stocks.

Rule 3: Invest in undervalued stocks that pays dividend regularly.

Rule 4: Reinvest your dividend money.

Rule 5: Be an investor, and not a trader.

Rule 6: Learn and master the skill to allocate capital.
Rule 7: Have fun, and enjoy investing !