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How to Win Your Fight against the Stock Market

Jan 21, 2016

In this issue:
» Property rental yields in India lowest in the world
» Are we entering an era of increased volatility in asset prices?
» ...and more!
0.00
Rahul Shah, Co-Head of Research
  • You know what I learnt losing that duel? I learnt that I'll never win. Not that way. That's their game, their rules. [...] only by admitting what we are can we get what we want.

- Petyr Baelish, Game of Thrones

Baelish is a character from the hugely popular American TV series, Game of Thrones. He's a shrewd thinker who keeps the other characters on their toes...and me on the edge of my seat.

Why on Earth am I reciting dialogues from a TV show here?

Well, Baelish has an uncanny knack for strategising. And this nifty little piece of advice he doled out in one of the episodes has great takeaways for the stock market investor.

Brave investors are quick to stage duels with the stock market. Little do they know, it's is a game they cannot win. Not if they play by the stock market's rules, that is.

The stock market is much too whimsical...and totally ruthless. If you play by its rules, it will shake you and break you until you have not a penny left. And it won't hesitate to do so.

So how do you avoid playing by the market's rules?

Here's how:

Don't fight it where it wants you to fight

Don't haggle with every situation the market throws at you. Whether it's the hot new IPO, a company with a complex business, a sunrise sector, or an exciting new technology that promises to change the world - investors feel the need to have a fix on every single thing that comes their way.

In doing so, they often end up making investments that were, in truth, much too difficult and tricky to take a call on. So, pick your battles wisely. Choose only to fight the market in the few instances where you are a 100% comfortable. Indeed, smart investing is all about knowing your weaknesses as an investor and avoiding the many situations you would be no good at.

Don't fight it when it wants you to fight

The financial community, populated by intermediaries that make money each time you trade, loves to make you feel that you should always be doing something.

That's just not true!

Astute investors don't fully engage with the market at all times. Such investors know that there could be times when you avoid the market like the plague. Then there are other times when you back up the truck.

As stock prices go up and down in the endless churn of the market, astute investors are careful about when they fight their battles with the feisty market. They're not afraid to increase their cash (debt) allocation when the market is high on enthusiasm. And they're not afraid to pounce on it when the market is down and out.

No one can be a 'know-it-all'. There's only so much we can be good at. As investors, we have to recognise our few strengths and many weaknesses, and only engage with the market when and where the odds are in our favour.

Baelish was right. Only by admitting what we are can we get what we want.

Do you think these are good strategies for success in the stock market? Let us know your comments or share your views in the Equitymaster Club.


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2.33 Chart of the day

We all want our investments to fetch us regular income. And if possible, also to appreciate in value over the years. Sometimes though, investors get so enamoured by a particular asset class, they forget the importance of the first step, and directly jump to the second step.

Real estate has for long been one such asset class in India. It has been one of the preferred places for investors to park big money. However, all of the emphasis on property price appreciation has meant that rental yields - annual rental income as a percentage of the property's purchase price - have fallen to abnormally low levels.

In fact, as the chart of the day highlights, rental yields in India are possibly among the lowest in the world. At 2.2%, it means that investors get next to nothing in terms of income. Consequently, for good returns, the entire reliance is on property price appreciation. And history tells us that this is not always a given. Up is not the only direction prices move in here.

Rental yields in India lowest in the world

3.45

The Chinese growth rate is slowing, and there is a demand-supply mismatch in the crude oil market. But are these events big enough to induce the kind of extreme volatility we have been seeing in asset prices across the board?

Mohamed El-Erian, former head of investment management firm PIMCO, has an interesting take on this subject. Central banks around the world are now less willing and less able to act as suppressors of volatility. Many investors realise this, and are getting uneasy, leading to higher risk aversion and deleveraging among them. This, along with lower liquidity is leading to an amplified impact on asset prices of even the smallest developments in China and oil.

Perhaps it's time that policy makers and central banks look beyond short term measures, and work towards a more concerted and sustainable response to global economy's troubles. If not, we might just be in for an era of much higher volatility in asset prices.

4.44

The Indian stock markets were trading on a sombre note today. At the time of writing, the BSE-Sensex was trading down by around 95 points. Losses were largely seen in energy and auto stocks.

4.56 Investment mantra of the day

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "How to Win Your Fight against the Stock Market". Click here!

1 Responses to "How to Win Your Fight against the Stock Market"

kamalakanta

Jan 21, 2016

May be I have not content of the subject article because there is another proverb "Walk along the market rend" ( ) We request U to kindly explain the correct path ( )

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Equitymaster requests your view! Post a comment on "How to Win Your Fight against the Stock Market". Click here!
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