The 5W 1H Of Equity Investing:
Here is a quick brief for all those who are taking their early steps into the world of equity investing.
Let us use the 5W 1H framework (Who, When, What, Why, Where, & How) to decipher your requirements and the approach you may want to take.
Here is my version of the 5W 1H Framework,
Who is investing?
Who are you? The investing strategy for a student, a young adult, a working professional, a job aspirant, a new startup/business founder, a financially well-established individual, will be different.
What suits one group may not suit necessarily suit the other! Your needs will vary depending on where you are in life and where you intend to be in the future!
When should you invest?
Honestly, you should invest whenever you have spare capital. Here is a simple thumb rule,
Capital that you Should Invest = Your Earnings – Your Expenses – Contingency Fund
The Right-Hand Side of this equation simply works out to a % of Your Savings.
What are your expectations from investing?
One of the largest errors that people make when investing is a mismatch between their own expectations (the returns you expect) and the investment style they choose. Do note that companies do move across investment styles and market capitalization buckets.
While this matrix is easy to understand, it is far too naïve!
This is a better explanation – You need to invest in companies that earn a Return on Equity higher than their Cost of Equity!
What is this ‘Cost of Equity’? It is the minimum required return that a large, diversified equity investor expects from the underlying company for bearing the risk of ownership of the asset (shares).
Why are you investing? Why are you investing in this company?
It is believed that asking yourself ‘Why’ 5 times will lead you to the true motive behind the decision you make.
You should undertake this exercise for all your investments repeatedly (say every few months). This will help you build confidence in holding onto your winners and cutting your losers.
Where should I invest? How much do you know about business and valuations?
You have quite a few options when it comes to equity investing.
Managing investments can be stressful due to market gyrations. A good week can quickly turn into a bad week within a few hours! The ability to withstand and overcome emotional duress especially during testing times is a key factor for success and represents the mental cost that you pay!
The attractiveness of these vehicles to you will vary based on your experiences and the inputs you receive from your surroundings!
I sincerely hope that my 5W 1H Framework helps you in your equity investing journey!