The keys to investing in equity

'I bought this scrip last week and it is down. Should I sell?'

'The markets are trading at a peak. Is it right to invest now?'

'I want to make maximum returns in minimum time. Suggest some stocks.'

'Which are the stocks worth buying with price less than Rs. 50?'

'When will the market correct? I want to invest in some good shares.'

This kind of approach to investing in equity is a recipe for disaster.
There are some serious problems here. Let's pick up some important lessons.

Lesson 1

The moment the prices of scrips drop, say, by 5%-10%, we get worried. In that anxiety, we want to sell and get out.

Let's say the Reliance share you bought last week is down 10%. So what? Will Reliance business close down? Or will Mukesh Ambani run away with your money? No.

The movement in stock prices has no impact on the business. Reliance will continue to make profits and grow. Mukesh Ambani will continue to build world-class projects. If that is the case, Reliance shares will see new heights in future. Why bother about these falls which likely will only be temporary?

The problem is, we buy stocks, not businesses. The Tatas and Birlas have been around for over 100 years. Hundreds of successful companies have run for decades and continue to grow irrespective of the stock market volatilities.

Yes, some businesses succeed, some fail. There are ups and downs. That is the inherent nature of a business. But, in the long run, they will make profits and grow. That is where management counts. Good managements run profitable operations.

Second, that's why we diversify. Even if we lose money in a few stocks, we will still make lots of money in others.

Moral: Buy businesses, not stocks.