Investment Life Cycle to Wealth - All You Need to Know About

We will start with a true story.

A few days ago, when the original corona lock down started, a friend of mine, invited me to have a cup of coffee in a nearby coffee shop.

Upon reaching and having coffee, he enquired some information on direct investment in stock markets.

He had all the facilities in hand, such as trading and demat account and so on.

Story of the Friend

He started sharing his past experiences of stock investing and all those investments later ended with huge lose! Thus, he was worried. He wanted to bring back the lost money as well as to create a good portfolio with right stocks.

However, he was not aware whom to contact and where to start. He was also a little anxious about the bad involvements in the past too.

By knowing my successful investment history, he thus decided to contact me to get advises on investing money to the stock market directly.

Reason of the Failure!

Through his story, I learned the reasons behind the huge investment loss. He was blindly investing to the stocks by taking advises from the one whom he met, without doing any required homework. A huge mistake! isn’t it?

It’s totally against my principles of investment and listed them among the "Deadly Investment Mistakes!"

The Starting Point for Him

During our conversation, I asked him to pay close attention to the coffee shop counter for next 10 minutes and let me know what the customers were ordering the most.  

After 10 minutes, he found most of the customers were ordering for cappuccino from the counter. I again asked, why most of the orders were going for cappuccino as there were other flavors of coffee available as well. He answered that the cappuccino is the most renowned in the place.

I said him; that was the first lesson to select a stock to invest! Invest on the stocks of the companies that have monopolistic position with the products and services which the customers frequently in quest of.  

If a particular product or the services are not available in the market, then only the customers seek for other products or services. It clearly shows the dominant position of the product and the company.

I, then stated examples of a few such companies and clarified why I prefer those companies.

Being convinced himself with the first lesson, he asked the next question, “when to invest”? I started with the step by step process covering all the important facts a stock investor to consider before starting an investment:

Here is the Investment Life Cycle to Wealth

The process of creating wealth over stock investments goes through various stages :

Setting Investment Goals >>> Acquiring Knowledge >>> Identify the Companies >>> Identify Right Time to Invest >>> Determine the Holding Period > >> Monitoring Investments>>> Know the Selling Time

Here is a detailed writing on each session to be read carefully. To make it more interesting, I attach this to my successful personal investment story.

Setting Investing Goals

It is the preliminary stage of any investment. Whenever making an investment decision, one should have a clear goal behind it. Why investing, how long to invest, what I am going to achieve with these investments? These are some of the most common question and investor ask self before start investing.

My stock investments started with a clear goal of retirement as well as the education of kids.

Goal settings are the core of an investing life cycle. Investors generally set goals for short, medium and long terms but, for a value investor, who believes in the rule of creating long time wealth, generally set long term goals by considering the growth possibilities of wealth by doing so.

Remember, stock investment meant for long time, say, more than 10 years. It is not a right instrument for short time investors. If still investing for short time, then it is not investing, but trading, which is dangerous.

Acquiring Knowledge

Perfect investments can be made by acquiring enough knowledge at the beginning. Must focus on the qualitative and quantitative sides of the businesses to identify the suitability to invest.

Qualitative analysis helps to identify the best businesses through the choice of customers on its products or services and its popularity in the market.

We have already found how the customers are most attached to cappuccino because it is popular in the consumer market. Qualitative analysis purely a common sense approach and no numbers and figures are attached to it.

Through quantitative analysis, exposing the growth opportunities of the company or business by calculating its profit, expenses, debt etc. It is purely number based and need good knowledge to analyse and compare the major financial factors of the company.

There are lots of online sources available to do the same.

Identify the Companies

Through qualitative and quantitative analysis, as discussed above, investors can prepare a list of stocks from the best companies available in the stock market. By narrowing down the list further by comparing with all companies in the list, one can easily come to a conclusion with the best companies in the list to invest.

Remember, Identifying the companies doesn’t mean to invest in it in the same time. Read the below points carefully before making any investment decisions.

Identify Right Time to Invest

If you had read my previous article in this blog, “Corona-virus Lockdown – A Golden Opportunity for Stock Market Investors”, you now have a good idea on the factors helping and investor to take critical investment decision.

Also posted a must reading article for every investor, “Macro and Micro Factors: What Every Stock Investor Must Know” have an excellent insight on how to understand the time to invest. If you have not yet read this article, read it without fail as this article directly attached to this phase, identify  the right time to invest.

Macro effects to the stock markets drag the market down to a great extend and intelligent investors would find such as a beautiful investing opportunity!

For example, a recent macro effect, the coronavirus lock down, affected the worldwide stock markets very badly and taken down to bottom level. Good stocks thus given an excellent opportunity to investors to invest in a bargain price. This is how the macro factors affecting the stock markets and investors getting opportunities.

Remember, macro factors are temporary. In this case, once the corona crisis is over, stock markets would boom up like a hydrogen filled balloon!

There are other examples too for Macro effects are, economic recessions, industry recessions, temporary bad news on a company, major events in the nation like general elections etc.

As a tip, upon ending the corona crisis, investors can expect another economic slowdown worldwide. So, prepare for it, find your best companies, wait for a bargain price, invest on that for long time.

Determine Holding Period

As informed earlier, investor should have an investing duration in mind. This would decide how long the stocks can be hold in the portfolio.

Legend investor Warren Buffett says, “his holding period is forever”! No doubt, every businesses were Warren Buffet invested has enough potential to hold forever.

Stocks selected through well study and as per the factors mentioned above, do not required to sell prematurely instead instead any micro effect detected.

Investors have options to sell the stocks at the peak and buy the same when comes to the bottom level again.

Monitoring Investments

Monitoring the investments have equal importance with finding and investing in stocks. From the time a stock included the portfolio, investor should have an eye on the news and performance of the company he or she holds. This would help to decide whether purchase more stocks of the company or sell it.

Investor must read the annual reports and news's about the company.  This will helps to get updated with various developments are happening in the business space.

Identification of selling time

Identification of selling time is the most crucial part of investing life cycle. This is a stage can really test the patience and personal qualities of an investor from the very next moment of investing to a stock.

As a value investor, one should possess with necessary information on selling time and possibilities.

Reading great investing guides from Benjamin Graham and Philip Fisher will help you to identify the exact time to sell a stock.

Happy investing! Let me know if you have any clarification on any of the above points.