What is the key to great investing in stocks? Contrary to general assumptions, successful stock investing is not really about doing a great amount of research on companies or learning technical analysis or building access to inside information.
Rather, the secret is to discover what kind of investor you are, and tailor your investments to suit your innate style.
The world's greatest investors, from Warren Buffett to Peter Lynch, did not become great by seeking tips from stockbrokers and market mavens.
Rather, they studied the markets, took cautious risks directly, learnt lessons from their failures, and invested according to their own understanding of the markets. In short, there are no short-cuts to millionaire-hood.
Step One is to understand what kind of an investor you are. Fool.com, a popular, maverick website for investors, lists five or six broad investing styles.
Top of its list comes the value investor. The value investor looks at numbers -- reads balance-sheets, looks at key ratios like return on shareholders' funds, the book value to market price multiple, cash flows, etc.
The aim is to locate stocks that appear fundamentally undervalued by the market and then wait for the market to discover the same truth and then benefit from the price gain.
Then there are growth investors -- those who primarily see value in revenue growth rather than profitability.
These investors watch top lines more than bottomlines, believing that profitability will follow if sales keep growing.
They try to spot companies before they start earning big profits and hope to make a killing when that happens. Compared with value investors, growth investors take more risks.
Lower down the risk scale you have investors who look at dividend yields -- that is the percentage return from dividends on current market prices.
Many companies with low growth potential but high cash earnings fall in this category. They offer low risks, the possibility of capital appreciation, and fairly reasonable dividends.
The idea of investing in these stocks is that even if the share prices don't move much, you get the consolation prize in the form of dividends.
Again low on risk are large-cap investors. Here, the idea is to invest in companies with a large market capitalisation.
The expectation is that you are less likely to go wrong in the long run, never mind where short term prices are headed. Companies such as Infosys Technologies or Hindustan Lever fall into this category.
Much more risky is the next category -- the small cap investor. These investors typically invest in stocks that have a small market cap in the belief that when the market moves up, the prices of these shares will move up disproportionately.
The downside is that prices may also move down disproportionately if the market tanks. But that's part of the game.
Investor , know thyself
Before you start looking at specific stocks to invest, you could figure out which category of investor you belong to. This will automatically tell you where to look for stocks that suit your style.