Ali Bahçuvan/ Economist When I have been asked by university students to write an article on ‘winning investment strategies at stock market’, I thought first of beginning by writing ‘actually there is no magic formula in this business’. Bu that would be too classical…
Golden Rules for Stock Market Investments
Ali Bahçuvan/ Economist
When I have been asked by university students to write an article on ‘winning investment strategies at stock market’, I thought first of beginning by writing ‘actually there is no magic formula in this business’. Bu that would be too classical…
There are so many possible titles for an article about ‘winning investment strategies at stock market.’ I have finally decided that the best way to talk about it is as follows: “Just as nothing is one hundred percent surein our life, the same is true for the stock market while there are many investment strategies that have been tried and succeeded.”However, which we risk against what and our expectations are the golden key that can open doors. If theprimary objective is to be happy, then it is important to determine which yield makes us happy. If our expectation is too high, we should know that we take the risk of happiness along with unhappinessto the end.At that point, the last thing to tell a person who will never become satisfied is “invest in the stock exchange.”
In my stock exchange investment career, which I began when I was studying at university, I met such characters that I wished very often they had never been investors at all. These people have wanted to buy at the lowest and sell at the highest price. The result has always been unhappiness. They thought they had bought cheap, but prices have further decreased and they felt upset. They thought they had sold for a higher price but prices further rose and they got sad again. They always got sad when those who bought stocks from them profited and those who sold to them made money…
One’s profit shouldn’t be another’s loss
Actually it should be the exact opposite. As different from other derivative markets, stock exchange has been envisaged as a platform where everyone wins.One’s profit shouldn’t and cannot be another’s loss. Many stock traders have a wrong idea about this. The underlying logic here is to become a partner of a company. As long as the company grows and pays dividend, those who buy its shares will profit. The main point here is the growth of the company and its profits and the progress of price movements within this context. If the investor, who preferred the right company from the right sector, can buy stocks at a reasonable price level hewill continue to win every time. The point at which the investor sells his stocks is the one where he gets happy. Those who turned the issue into challenge and gamble although the purpose is not that have caused losses to millions of people. Today’s crisis is the result of that flawed mentality.
I would like to tell you about a strategy for newcomer stock exchange investors, a strategy that will allow a person to make money withoutgetting into trouble. The greater the experience, the greater the courage to take the risk of unhappiness and losing money. This investment strategy aims to prevent heart problems and keep you from having sleepless nights, intending to make you take minimum risk at stock market.
First of all, it is important to pay attention to our capital structure. If the capital is based on a resource that we will need in the short run, or a resource like debt-credit, our chance of success diminishes and the distress that will be created by this will not allow us to makecorrect decisions.If we tie our entire capital up in the stock exchange, we will lose the chance of averaging our cost at lower prices when the market declines and will lose possible new opportunities as well. Let’s assume we have transferred a certain amount of capital – for newcomers at the stock market, 25 percent may be appropriate- that we will not need in the short run, to the stock exchange. At this point, it will be reasonable to not center our risk at the stock exchange on a single stock by distributing the risk to different stocks from different industries.While those who conduct research and studies about these issues in other countries say 7 stocks will be optimal, I think the final decision is up to you.Select stocks from 5 or even 10 different industries, but never limit this number to 2.In this type of portfolio, first of all you have to make a correct calculation about the yield. If the targeted yield is exaggerated with regard to the interest rates in the market and other investment instruments, it may never become possible to reach that point.For this reason, newcomers will be more successful if they setmodest targetsat the outset.
Just as nothing is one hundred percent sure in our life, the same is true for the stock market while there are many investment strategies that have been tried and succeeded.
Selection of Company and Industry
When selecting industries, it is important to choose those that are poised to grow, having no potential problems with public authorities about tax or regulations. For example; let’s think about a company that is engaged in an activity which has been banned in the European Union because of causing damage to environment and which may be banned also in Turkey after a while. Is this company ready to the new situation?Has it made the necessary investments and will it be in a position to compete in the market? Any investment made without answering these questions can cause huge losses.
Getting into partnership with the right boss
No one wants to go into partnership with a person who may steal, cheat, and lie even in the simplest transaction. It is the same when investing in the stock exchange. In a country like Turkey where principles of corporate governanceare often ignored, behaviors of a company’s controlling shareholders can determine many things and their acts of theft (hiddenresource transfers) cannot be adequately prevented. So, it is crucial to get into partnership with right people. Some experts avoid becoming partners with those people who appear much ontabloid press and in show business world and keep away from buying shares from these people’s companies.
The company’s financial statements should conform to internationally accepted standards. Companies that may face financial problem at any moment, havingcash flow risk and lacking proper financial management should be avoided. At this point, working capital ratio, market to book value ratio, andprice-earnings ratiocome to the forefront. Since expectations are bought and realities are sold at the stock exchange, it is more important to analyze how good these ratios will be at least a year later rather than focusing on their current levels. And this is directly related with the targets of companies and their ability to realize opportunities. Innovative, easily adaptable, highly creative companies should be especially preferred.
While many experts in the market do not believe it, this is an important analysis since it can give correct results at some critical moments. It allows us to identify possible prices in the future by looking at price movements in the past. It allows us to buy those stocks that we determine not only with this method but also with other methods. If it is singly used, it can cause huge losses.
Modern portfolio theory
Despite so many statistical analyses over the years, MPT (modern portfolio theory) is jokingly termed as EMPTY by putting one letter both at the beginning and the end of the acronym. However, many portfolio management companies use this method to adjust fund risks. You can try it to measure a portfolio’s risk and learn how to use the method.At companies that respect investors’ rights, investors should have the same rights with controlling shareholders throughrules like one stock-one vote, and equal dividend. Otherwise, controlling shareholders can steal company’s resources after selling 90 percent of the company and managing it with the remaining 10 percent. Such companies do not bring much money to investors and their stock are traded below the market average. But sometimes a manipulatorcomes into play and raises share price in cooperation with the company’s owner and tries to swindle people’s money by selling the share at high prices. Stay away from such shares and thieves.Believe meeven if you make money from such a share, that money will not do good to you. At the next turn you may lose even morethan that.