Beat the crash: heed the 12 commandments

Tuesday, January 22, 2008

Beat the crash: heed the 12 commandments

By PV Subramanyam

I have been inundated with calls from friends and students on what an investor should do when he or she is staring at blood in their portfolios.

It reminds me of the saying -- 'this too shall pass'. I do not know its origin, but am convinced that in investing, as in life, you should keep your cool.

This advice is, of course, meant only for long-term investors and not for traders. So, go ahead and use these tips:

1. Be conservative.

If you thought the Reliance Power issue was over-priced, do not apply 'hoping' it will open at a premium.

2. Learn from the best.

Classic investing books or conversations with trustworthy individuals will always prove to be useful. Devil take the Hindmost: A history of financial speculation by Edward Chancellor, a classic book about rising and falling markets, could help you understand the reason for the volatile market.

3. Don’t take advice from those who are not flexible.

The market is not for the dogmatic; you need to adapt to the information that is available to you.

4. Debt funds are useful for capital protection.

And capital protection partially is a fantastic thing to seek.

5. Simple, dull, boring businesses give very good returns.

Banking is one such business. You need not invest in biotechnology, aerospace engineering, and the likes! Peter Lynch, a Walltreet Street stock market investor says, “Never invest in any idea you cannot illustrate with a crayon.”

6. Some businesses are good for you as a consumer; it may be a while before it is good for you as an investor.

The airlines are a good example. And some businesses are good for you as an investor, terrible for you as a consumer -- tobacco for example!

7. Buy umbrellas in the summer.

8. Buy only the best of the breed during periods of economic or market uncertainty.

9. Be patient. Be grateful to God, start with a prayer.

-- Sir John Templeton, stock investor, businessman and philanthropist.

10. Buy when you are panicking. Sell when you become overconfident.

11. Investing is about common sense.

12. Don't compound the mistake of buying high by selling low.

If you have bought high but believe it’s worth it, do not let the market bother you. If you have lost confidence in the company, sell. Price is just what the market thinks about that company on that day.

The author is a financial domain trainer and can be contacted at pv.subramanyam@moneycontrol.com


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