What does it take for someone to be successful in equity investing? By equity, we refer here to single stock investments and not equity mutual funds. You need three things to be successful: time, money and access to information.
Time: For most of us who hold day jobs, lack of time is the biggest impediment to investing consistently. Think about it. You come in to work and within a few minutes are barraged with calls from your broker about buying or selling some stock. You stall him saying you need to research them first. You pore through the company fundamentals over the day and get back to him with your decision. The broker calls you back in a few days about another hot stock. This time, you are preparing for an important meeting and have no time to entertain his call. You stall him a few more times and eventually lose interest. Stock investing is an intense activity, best left to those whose full-time job is to research and pick the right stocks, such as a fund manager in a mutual fund.
Money: If you invest in stocks, you must have a strategy in place. Random buying and selling without a plan is speculating, not investing. You may make some money on a few trades but you will find it hard to sustain your luck over longer periods. Often a random mishmash of 70 or 80 stocks in a portfolio, with no logical thinking or strategy supporting them. Sometimes the value of a single stock is a few thousand rupees in an overall portfolio of a few lakhs. Even if this stock were to perform spectacularly well, it will hardly move the needle on the overall value of the portfolio. Strategy is critical for providing direction to your convictions, be it about a sector or a theme. For example, your strategy could be to replicate an index. You need enough money to be able to buy the stocks in the index and hold them with similar weightages. You cannot execute this strategy with a few thousand rupees, or even a few lakhs.
Access to information: We live in an age of information overload. Often, we make hasty decisions based on what we read in the newspapers or what we see on television. Nothing could be worse than this form of investing. Markets react to news—whether good or bad—within minutes. By the time you read the news in the papers the next day or watch it on television later in the day, you are already too late. The stock’s price has already adjusted to the news much before you got wind of it.
In the short term, playing the stock market is a zero-sum game. For each stock that someone considered undervalued and purchased, there was someone who perceived it as overvalued and sold. Those who made money did so at the expense of those who lost money. The loser, obviously was someone who did not have the three fundamental attributes mentioned earlier. However, if you hold a well-managed, diversified portfolio of stocks over the long term, the zero-sum game does not apply. All investors will have made money over the long term, since the entire market appreciates over time.