It is often said that the secret to getting better returns on your investments depends on the knowledge you possess about a particular sector. The better you know the sector, the better investment decisions you can take. In other terms, the sectors that fall under your knowledge level tend to give you better returns both in short-term and long-term.
According to stock investment experts, smart investors tend to restrict themselves to the business domains they understand. For more investors, investing other than their ‘circle of competence’ is what gives the maximum losses. Apart from choosing the best stock broker in India, understanding your ‘circle of competence’ is another thing that is very important in the field of stock investment.
Now comes how to determine if a business falls under your circle of competence. The simplest answer is to get the answers of the following questions.
· How it performs?
· Which elements fuel its growth?
· What makes it lucrative?
· How does it stand against its competitors?
· How does it handle its raw material expenses?
· You need to get the answers to such questions, and others like these to make sure that you understand the business.
The time you put in choosing the best stock broker in India for your investment should be equally proportional to the time you invest in deciding your ‘circle of competence’. It is highly recommended to don’t enter in a circle of competence that is beyond your understanding as it tends to make you suffer losses.
If you don’t know everything about a business, you may not be able to take sound investment decisions in that sector. Investing in something which you do not know much about will make you do wrong assessment and in general, it will turn out to be a poor investment. The top 10 stock brokers in India emphasize that the investors who move outside of their circle of competence locate themselves in a lot of trouble later.
How you can enlarge your ‘circle of competence’?
If you assume that your competency circle isn’t too extensive, there is nothing to worry about. With time, you can improve it and inflate your circle of competence. How? It is very simple – to gain more knowledge about new industrial sectors you’re interested in.
That’s the only preferred way to increase your circle of competence. In fact, even a doctor can have a circle of competence is the engineering sector if he being to gain industry insights on a regular basis. Take a look at this quote by Charlie Munger stressing the importance of reading:
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” -Charlie Munger
No matter which best stock broker in India you choose to work with, it is very much necessary to have your own understand of the sector you’re planning to invest in. The more precise information you have about something, the easier it would be for you to take decisions.