Sunday, September 11, 2011

Thoughts on investing

Sunday morning is a good time to share philosophical ideas on investing.

As I undestand, investing is all about value. We put hard earned money in an asset when we perceive  value in the price. There is very little market timing. It is a coincidence that value usually comes about when markets are recovering from bear trends.

Investing decisions can be based on value in the market as a whole, or value in individual stocks. If I think that the market itself has value, then buying an index fund, or even a diversified equity fund would be a good investment idea. I use long term charts to determine if the market has value - currently, to me, the answer is - not yet.

What about individual stocks? Many stocks may offer attarctive prices to the investor, irrespective of market conditions, or because of bear market conditions. Investors willing to put money in these stocks can consider an SIP - systematic investment plan, investing every month on fixed dates.

All investors, whenever they invest should consider these issues:

1. What is your risk tolerance? Investing requires the understanding that stocks can continue going lower. There is also normal market volatility which moves stock prices up or down. You should not pretend to be an investor when what you are doing is actually trading.

2. Selection of stocks. How do you select a stock? You should write down the reasons for selection. If the basis changes then be prepared to exit. Again, make sure that the reasons are not just technical. "I am buying because prices have crossed the 50 day MA " - this is not an investment idea - it is a trading strategy. An investment idea could be: "Markets can go down another 20%. I will be a buyer in Reliance at 750, understanding that it could touch 600. I will do an SIP in this stock. The basis for buying Reliance is its position as India's largest private sector company available at half the price as compared to its high. I will review the position after every quarter. If the funds / analysts become negative on Reliance then I will reconsider".

Since there is a lot of subjectivity in the buying decision as outlined above, I prefer to wait for deep value, as well as a consolidation on long term charts. This often results in missing opportunities. So, for each investor, the process needs to be personalised.

What do readers say?

1 comment:

RS said...

Hi Sir,

I feel, I have met very few people in my life whom I can call as investors. In fact, I have a coined a term too for the so called typical Indian Investors. I call them "DELIVERY TRADERS".

Almost everybody in India is a trader...and most are Delivery Traders who masquerade in the garb of a INVESTOR.

In a bull market (2001-2008), they buy stocks and sell them off with a 10% or max 15 % gain. Fair enuf...its a good amount but In a long term corrective phase (As going on now), They just cling on to their delivery trades even after seeing their wealth erode by good 40-50%. Yeas...I know a lot of people who are invested in Educomp.

And u just can't argue with them. If u explain them the rational using charts, they see, I am long term investor but I just fail to understand, wher does this philosophy g???, when they just move out of a good stock that too in a bull market with 10-15% gain. Example Tata motors (move from 300-1300)

Selling with 10-15% gain and staying put with 40-50% loss...I just can't understand the rationale...Ur views please

RS (Baba)