When you invest in the stock market, you’re buying equity in the company that issued the shares, meaning you actually own a portion of that company, proportional to the amount you’ve invested. So, to the extent of your investment, you’re essentially a business owner.

How many of you have wanted to start your own business but lacked the capital or guidance? Through the stock market, you can own shares in not just one but multiple businesses. While it may be a small ownership, if you hold a share of a company, you are, in fact, a part-owner of that business.

Putting money into stocks works a lot like investing in your own business. If that company does well, your money grows, and you can benefit from its success. In the stock market, you gain in two main ways: dividends, which are a portion of profits distributed by the company, and stock price appreciation as the company grows. While dividends are nice, most investors aim to sell their shares at a profit as the price rises over time.

So, if you’ve been looking at the stock market as a form of gambling or quick trading, that’s not the approach I’d recommend. Stock market investing should be viewed from a long-term perspective.

Investing is essential if you’re financially literate—it’s about putting your money to work, instead of just letting it sit in a bank account.

If this perspective interests you and you want to start learning, I highly recommend reading Learn to Earn—A Beginner’s Guide to The Basics of Investing and Business by Peter Lynch. It’s a solid resource for beginners.

My Early Experience

I’ve been involved in the stock market for a while now, and today I want to share the strategy I’ve developed through years of experience, including ventures into cryptocurrencies like Bitcoin, Ethereum, and even a few shitcoins. Just to clarify, this is not financial advice—I’m simply sharing my own journey.

I started “playing” the stock market in my early 20s, though it wasn’t investing in the real sense. Like many beginners, I made a lot of rookie mistakes, often driven by FOMO. Whenever I saw a stock climbing, I’d jump in, only to watch the price stall or drop soon after, which led to panic selling. For a long time, I repeated this cycle, and I know many others have gone through the same.

I experienced similar ups and downs with Bitcoin. In my early years, my income was also relatively low, so losing money this way was especially painful. But as any seasoned investor will tell you, the lessons learned through these losses are priceless if you take them to heart.

My Current Investment Strategy

At this point, I’m basically breaking even in terms of profit and loss. After learning my lessons, I shifted to mutual funds and held my investments for several years. Eventually, I sold half of my mutual fund positions and all of my cryptocurrency holdings last year, using the proceeds to pay off my home loan. Today, I’m not sitting on large profits, but I’m equipped with a strategy and valuable experience.

Here’s the strategy I’ve settled on—if anyone experienced in the market is reading, feel free to let me know what you think.

First and foremost, when you enter the stock market, do so as an investor, not as a trader or gambler. For beginners, mutual funds are the way to go. By investing in mutual funds, you spread your risk across multiple companies, so the impact of any single stock’s ups and downs is minimized. This distribution lowers your risk and gives you more stability. The only major risk is if the entire market or economy crashes, but if that happens, you’d lose money regardless of where you kept it.

Historically, economies do recover and grow over time, so I believe in investing consistently, especially through mutual funds via an SIP (Systematic Investment Plan). This way, a fixed amount goes in at regular intervals, regardless of price, so if the price drops, you end up buying more shares, lowering your average cost.

As for direct stock investments, I stick to quality companies and only buy in bear markets, when prices fall significantly (usually 10-25% or more). During a bull market, I avoid new stock purchases but continue with my mutual fund SIPs while setting aside cash to buy stocks during a downturn.

When buying stocks, I never invest the entire sum I’ve set aside at once. I break up my investment, entering the market gradually as prices fall. For example, if a stock on my watchlist drops by 10%, I’ll buy a small amount and hold, waiting to see if it drops further. If it does, I’ll buy more to average down my cost. This way, I don’t exhaust my cash reserve all at once, as the market could continue to drop. My goal is to build a portfolio of around 5-10 solid companies and only add to it during bear markets.

After paying off my home loan last year, I’ve stayed committed to this approach, focusing on mutual funds and selectively buying stocks during bear markets, like the one currently happening in India. Once the market recovers, I plan to pause stock purchases but will continue with my SIP in mutual funds.

If there are any seasoned investors reading this, let me know your thoughts on this strategy. Again, this is not investment advice, just my journey and perspective. Although I haven’t made millions, I’ve managed to recover from losses, stabilize my finances, and gain confidence in this approach.

Maybe in a year or two, I’ll write an update on the progress and share how this strategy has worked out for me. Happy investing!

Update (Nov 26, 2024)

You can also read this section as a thread on X.

I am adding this update less than a month after writing the original article because it is such an important point that I overlooked. In the section about direct stock investment, I mentioned that you should invest in individual stocks only during a market correction or bear market phase. I also recommended investing gradually, rather than all at once, to take advantage of falling prices and lower your average cost. While this approach is sound, there’s an important nuance I failed to address, and it would be a disservice not to share it now.

Direct stock investment, in my opinion, should be limited to 20–25% of your total portfolio. The remaining 75–80% should be allocated to mutual funds. Why? Because mutual funds also experience price drops during a bear market, and they offer the same cost-averaging advantage when you invest incrementally. So, why choose direct stocks over mutual funds at all?

Here’s where the key distinction lies: direct stock investments should only be made when you have specific insights about a stock—not just because the market is in a bear phase.

For instance, let’s say a temporary event causes a sharp drop in the stock price of a fundamentally strong company. During the pandemic, prices of luxury goods companies plummeted because malls and markets were closed, and demand dried up. But anyone with foresight could see that this was temporary, making it a good opportunity to invest.

A more recent example is the Adani Group. Following a controversy, the stock prices of Adani companies suddenly fell. Such drops, driven by external events, are often temporary, and if you can assess the situation accurately, you can capitalize on it.

Another example is Nvidia. If you had kept up with developments in AI and foresaw the explosive growth of the industry, investing in Nvidia before its massive surge would have yielded significant returns.

So, here’s the update to my direct stock investment strategy: forget about bear markets as the sole reason to invest in individual stocks. You can achieve the same benefits from mutual funds during a bear phase, especially if you’re consistently investing via SIP.

The only time to invest directly in individual stocks is when you have specific, actionable insights about a stock—be it a temporary price crash caused by an external event or a growth opportunity driven by emerging trends.

This revised approach ensures that your investments in direct stocks are purposeful and focused, maximizing your potential returns while keeping the majority of your portfolio diversified and safe in mutual funds.