7 habits of successful shareholders

by V. Ramesh for The Hindu Business Line, November 29th, 2010

One of the most significant effects of globalisation has been a forced change in the risk appetite of Indian investors.

Today, equity has become an integral part of everyone’s portfolio, including that of retired and senior citizens. This means that one has to be a shareholder either directly or indirectly through investments in mutual funds. But higher rewards seldom come without higher risks.

What then are the habits that would help a shareholder successfully manage the risks that come with shareholding?

Learn to think like an owner: An equity shareholder is part owner of the company. The first habit, therefore, is to start thinking and behaving like one. I can say without exaggeration that the amount of due diligence that goes into buying a refrigerator or TV is higher than when buying a share, though the sums involved are often far less.

We do detailed research to compare brands, verify their track records and compare notes with users. Unfortunately, when buying a share, people go by advice that is not always verified well.

The mindset is often speculative, not realising that speculation is a highly specialised activity not meant for amateurs.

By contrast, an owner thinks and acts more like an investor.

Familiarity with numbers: Many shareholders claim that they are not finance professionals and cannot understand the numbers put out by the company. Many of us are not doctors, but we understand the numbers that denote our health, such as lipid profile. Trust me, if you can understand the relationship between HDL and LDL, you can understand return on capital employed. All you need to know is that return is like the good cholesterol and capital employed is like the bad cholesterol, so if your company is managing this ratio well, your company’s cardiac health is robust.

Familiarity with financial statements is critical to understanding how well your company is performing and to pick up warning signals. (continue reading… )

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