Everyman's guide to stock investing

We have often heard that investing is all about common sense. But somehow, this logic eludes most stock investors. Especially during raging bull markets like now. In the rush to make more money, fundamentals are easily forgotten. Reason gives way to hot tips — you simply don't want to miss the stocks pegged to make roaring returns.

25 STUPID MISTAKES YOU DON'T WANT TO MAKE IN THE STOCK MARKET Price: Rs 275 Pages: 320 By David E Ryé Published By Tata McGraw Hill

But betting on luck is a dangerous mistake. You may end up making a bundle or you may end up getting walloped.

This and 24 other mistakes feature in David E Rye's book — 25 Stupid Mistakes You Don't Want to Make in the Stock Market. Just as the title promises, this guide identifies common but easily avoidable mistakes.

And as a bonus there is advice on stock market investing that you just can't miss. The author tackles the 25 mistakes in separate chapters. Through Mistake 1 — "I already know everything there is to know" — he introduces the reader to the basics of equity investing with an investor-awareness quiz.

Since a majority of questions are aimed at the American audience, Indian readers will have to customise some to test their awareness quotient. Through the second mistake Rye highlights the need for a well thought-out investment plan.

His eight-step strategy helps readers evaluate their networth, arrive at a plan for minimising losses and determine their long-term financial goals. It is Mistake 3 — "I accept hot stock tips from friends" — that will help many rein in impulsive trading. It warns against a very common practice: following tips from market pundits and brokers.

 "Be wary of advice from so-called experts in the newspapers or on television… by the time the average investor hears about a 'hot' stock, the big institutions have already made their move to take advantage of the situation," says Rye. The author stresses on investing with one's eyes and not ears. Avoid opinions, check facts. He also cautions against investments based on conversations in Internet chat rooms.

The author uses Mistake 4 — "I don't analyse the stocks I buy" — to introduce the reader to the fundamentals of technical analysis. You learn how to read annual reports of companies as well as analysts' reports on stock performances.

Mistakes 7, 8 and 9, focus on when to hold and sell your stocks. Mistake 10 — "I think global investing means buying stock in Taco Bell" — is quite timely. With global investing becoming popular in India, the chapter's guidelines for assessing investment options abroad should be particularly useful. The next few chapters talk about how to choose a broker, the benefits of mutual funds and online trading services.

The reader should spend more time on Mistake 15 — "Asset allocation is for wimps". It explains how to allocate your assets and adjust your financial plan with changing needs. For those who like to play the margin game, Mistake 18, is a must read. Be it surviving bear markets or riding volatility waves, the author provides a neat assessment of both in chapters 20, 21 and 22. This is followed by a quick analysis of the merits of bonds.

 It is through mistakes 24 and 25 that Rye talks about taking risks and mitigating losses. He equates an investor with money in hand to a kid in a candy house and insists that one should understand exactly what he is buying. From learning how to identify institutional activity, understanding return on equity (RoE) — high RoE is a reliable indicator of a what a company can earn in the future — to timing markets, the author tackles it all.

Written in an easy-to-read format, the book talks to the reader and is not a tome of must-dos. Instead it helps the reader revise the basics of stock market investing with mistakes acting as takeoff points. Rye starts each chapter with a quote from an investment guru that acts as a solution to the mistake. Sample this: "Selling your winner and holding losers is like cutting your flowers and watering your weeds" — Bill O'Neil.

However, this book has been written with the US stock market in perspective. All the examples are of foreign stocks that an Indian investor rarely tracks. The author calculates in US dollars, refers to the Standard & Poor's 500-stock index, quotes from Nasdaq's movements, benchmark's NYSE's volatility and insists that you subscribe to The Wall Street Journal.

However, the crux of the book is global. Since investor psychology remains the same whether he trades on the NYSE or the NSE, the book cuts across stock exchanges and is equally relevant for Indian readers.

True, this guide will not turn you into a stock market wizard. But it will definitely make you a more enlightened equity investor by ensuring that you are more careful while picking stocks. After all, Rye promises that all it takes to bag great returns is common sense.