Mayur Gudka

Ideas about Stock Market Investing for the Long Term

Can I buy insurance for my stocks?

No you can’t. No insurance company will cover stocks.

But there are three things you can do to lower your risk.

First … make an informed decision by educating yourself about each stock you are considering buying.

Second … buy your stock with a very high margin of safety. It’s means buy great companies at very low prices.

Third … keep a large pile of cash on hand. In an event where a stock price does go down after you buy it, you can buy more of the same stock and lower your average purchase price. So, when the stock is on its way up, you will make up your loss much quicker.

None of these three ideas mitigate your risks or work like an insurance policy would. Always conduct complete due diligence before buying any stocks ever. Remember … education is your best weapon against risk.

Four questions to ask before picking a stock

There are four specific questions you need to ask before picking a stock. Finding satisfactory answers to these questions will not only give you peace of mind, but also considerably reduce your risk and help you make an informed decision.

At the end of it all you will find that stock is either worth investing in or it is not worth investing in.

Sometimes … choosing not to invest in a stock is much wiser decision.

So, what are these four question? Let the suspense be no more.

First … how well do you understand the company’s business?

This is important because if you invest in an unfamiliar business, you do not know what makes the business successful or unsuccessful. And this can cause anxiety. As an investor, anxiety is your enemy. Familiarity is your friend.

Second … does the company possess a long-term, sustainable competitive advantage over its competition?

This is obviously a good thingĀ  for a company to have. It ensures that company can keep its market share and even expand it in the future.

Third … how great is the company’s management team?

A great management team with an average business can produce fantastic results. But, an average management team with a great business can often produce dismissal results. Hence, the quality of the management team matters.

Fourth … is there a considerable margin of safety?

After you buy a stock, two things can happen to its price. It will go up or go down. If you buy it at a higher price, chances of the price going down during a economic downturn is that much greater. But, buying the stock at a lower price ensures that stock will most likely go up in the long term. Lower the price, higher the margin of safety.

Should you find dis-satisfactory answers to any of your questions, I’d suggest stop investigating the stock and move on to the next one. I would.

How can one learn about stock market investing?

Learning about stock market is a lot like learning how to swim. No matter how much you read about it, the real education starts when you get yourself into the water.

I’d start with creating a dummy portfolio on Google or Yahoo! finance. Pick a few stocks I think are “good” stocks. Then I’d monitor their performance for a period of 6-months to a year to see how they do and try to figure out why they performed the way they performed.

There are three effective secrets when it comes to learning about Stock Market Investing

First … Ask a lot of questions and look for answers. Don’t stop looking for answers until you find the one you’re satisfied with.

Second … Read a lot of books.

And third … Stop watching CNBC. Their business lies in talking about short-term performance. Your objective is to learn what makes a company successful in the long-term.

Isn’t Stock Market Investing Risky?

Yes it is. So is driving the car, crossing the road, eating your food and a myriad of other things.

But do you not do those things? Of course you do.

You simply learned how to mitigate those risks. You took drivers ed and had months of practice before you got your license. So, you substantially reduced the risk via education?

You also look at both sides of the road before crossing. Did your parents teach you that? So, you mitigated with education again?

Do you swallow every morsel of food or do you chew it and break it into tiny little pieces before you ship it down your throat? How did you learn to do that? Aww come on … don’t tell me education again.

So how do you suppose you can mitigate the risk in stock market?

Understand this … You can never completely eliminate risk. If you could, the word accident would not exist.

But, you can always minimize it by taking appropriate precautions and educating yourself.

How much money should one invest in the stock market?

It depends. How much money can you afford to risk?

I never invest the money my family depends on for food, clothing and shelter. The rest … I invest.

Before you begin investing, you need to educate yourself on how to invest. If you don’t know what you’re doing, the probability of you losing money is very high.

Investing is a lot about common sense. Person who uses it best, wins. Use yours at its fullest.

Thoughts on taking and managing risks

I define risk is the fear of losing something we consider to be very valuable to us. The loss of it creates pain. Most people want to avoid such pain. If they determine a certain activity can possibly create pain, they label it as “risky” and stay away from it.

Life is risky

Everything we do has some degree of risk attached to it. Taking a shower is risky because we could slip, fall and break our hip. Playing in a playground is risky because a child could fall from a height and break his bones (my son almost did once). Crossing a road could get you hit by a car. You could even choke on the food you are eating and die. Yet, it’s funny how we don’t see these things as being “risky”. We have learned how to manage these risks. We chew our food so we don’t choke on it. We look on both sides of the road to make sure there is no approaching vehicle before we cross the road. We keep a eye on our kids at the park to make sure they are safe. And if we feel there is a danger, we ask them to be careful or lend them a hand until they are at a safe spot.

People fear the stock market. I did a decade ago. Maybe you do too. They stay away from it because they believe it to be very risky. Yet, there are millions who make money in the stock market. How can that happen? The answer is education. Warren Buffett said this a long time ago, “Risk comes from not knowing what you are doing.” The more you learn about a company and how it runs it business, your capability of making a quality decision improves. If you like what you find out about a company and its future prospects, invest in it. Or else, don’t.

Risks can be managed

Can I share a secret about risk with you? It can be managed.

Car accidents happen everyday. In some, people die. Yet, you and I get in our car every morning and drive. We can do this is because we have learned how to manage the risk. We have a “process” we never think about. We wear seat belts, we follow the driving rules. We do not speed. We do not change lanes without turning on the indicator first. We do not enter the wrong way. You get the point. Despite all that, can we get into an accident? Sure! Doing these things minimizes risk. It does not eliminate them. But, it minimizes the risk to a level where we become comfortable driving the car.

There are many frameworks out there that help you determine whether to take a certain risk of not. I want to share one of my favorites with you here. So, here’s how it works.

For this example, let’s say you are a family man with kids and have a cushy, comfortable job. You are considering whether to start a business of your own. You want to, but your wife sees it as very risky. In this case, here’s what you would do.

Take a pen and a piece of paper. Sit down with your wife at the dining table. Fold the paper in half and then fold it again so 4-columns are created on the paper. At the top of the first column, write “Worst Case Scenarios”.

Worst Case Scenarios

With your wife’s help, list every single worst case scenario that could happen by you starting a new business. Here are some examples to get you started.

  • Your business could fail.
  • You could die … not that businesses kill anybody but yours could. There’s always a first for something.
  • You could get sued by an employee or a customer.
  • Your employees could steal from you.
  • You would be so busy building the business, you would have no time to spend with your family.

Recovery Time

At the top of the next column, write down, “Recovery Time”. If an above listed scenario was to come true, how long do you believe it would take for you to re-create your life to the same point where you are today? Write down the recovery time next to each scenario you listed.

Best Case Scenarios

On the top of the third column, write “Best Case Scenarios”. If you were to start a business and it was to succeed, how could your life change for the better? What could you do that you cannot do now because of either time or money constraints? List down every single scenario possible.

  • Could you take more vacations? at better destinations?
  • Could you pay for your children’s college?
  • Could you retire early and comfortably?
  • Could you take care of your parents in their retirement?
  • Could you donate to the charity of your choice?
  • Would you travel the world the way you want?

Mitigation Tactics

Title the last column with “Mitigation Tactics”. What actions can you take to minimize each of the risks you listed in the “Worst-case scenarios” column? Can you start a low-cost business on a part-time basis and still continue working on your full-time job? Can you buy insurance to avoid losses from a lawsuit? Can you register it as a Limited Liability Company so your personal assets are protected? Can you put security procedures in place to avoid employees stealing from you? Can you hire some people so you the time it takes to build your business doesn’t affect your health or relationship with your family? Can you purchase substantial life insurance in an event you die prematurely?

Almost every risk you will ever encounter can be mitigated. The only questions are … what steps are you going to take to mitigate the risk? And how good is your mitigation plan? A better stronger plan offers you peace of mind and a sense of security for your family.

Decision Time

Now that you have listed the pros and cons, it’s decision time. Based on the sheet in front of you, can you make a quality decision? I’d say yes. This process has worked for me almost always time. If I cannot come up with good mitigation tactics, the decisions is a firm no. In most other cases, it’s a yes.

Last Question …

What does your decision process look like? Share it below.

3 reasons why we procrastinate

Years ago, I attended at a weekend business seminar down in Richmond, VA. Speakers taught us everything related to business – sales, marketing, building a team, managing your money and much more. However, there was this one speaker by the name of Kevin Bell. He shared 3 reasons why people procrastinate. The reason I remember this so vividly is because it created a paradigm shift in my thinking.

I am listing them here for you.

  1. We do not respect the process.
  2. We do not respect the result.
  3. We do not respect ourselves.

We do not respect the process

Getting in shape is incredible. You look good, you feel good and you live longer (well, unless of course you get hit by a Coors beer truck). But it’s a process. And the process is non-discriminatory as well as mandatory . Regardless of who you are, if you are overweight and want to get in shape, you need to develop healthy eating habits, better sleeping patterns and consistency in workout routines for extended periods of time.

When a saleswoman wants to make a sale, she has to go through a process of finding a prospect, calling the prospect, doing a presentation, following up with the prospect to answer any questions and finally making the sale. If she misses or refuses to do any of the steps in the process, the probability of her not making the sale is automatically high.

So, why do we not respect the process?

  • It’s not always easy and takes work.
  • The activities of the process are not in our comfort zone and requires additional learning on our part.
  • The results are not instant which makes it difficult to follow-through for longer period.
  • The repercussions of not going through the process are invisible in the short term.

We don’t respect the results

Losing weight and getting in shape is a great idea, but you know what? Round is a shape too. How many times have you heard people (those who look like a bottle of coke) say this? Making one more sale will make me another $500. But, do I really need it? I already have $8,500 in commissions this month. Why not take the time off and enjoy it instead?

The second reason we fail is not because we are lazy or unwilling to go through whatever it takes. It’s because we might not care about the result.

We also might not see any value of the result. And, if the result is of no value to us, then why pay the price (going through the process).

We don’t respect ourselves

This one’s a biggie, at least to me. This has more to do with a person’s self image than anything else. If we don’t think we are worthy enough of achieving a goal, chances are we most likely won’t even attempt it. We also become conscious of other people’s thoughts about us and if we don’t think they’ll approve, we procrastinate.

So, why am I writing about this now?

Because, this blog was supposed to be started years ago, like back in 2011 or 2012. But, it didn’t. I procrastinated for all three reasons listed above. I finally had to say, No more! No more am I going to be afraid of other peoples thoughts about my writing. No more am I going to be afraid of what other people thought about MY thoughts. No more am I going to be afraid of having to write one lengthy post a week. No more!

I’m excited to see where this blog takes me. And if nothing else, it’s a fantastic way for me to dump and aggregate all my thoughts in one place.

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