Jan 7, 2004|
Poll: The investment horizon
The equity markets are on a roll. Investors have earned returns ranging from 100% to 500% and even more on their investments in 2003, which is simply astounding from any and every measure. Even a passive investment approach like investing in an index fund would have returned a handsome 70%+ (BSE-Sensex gained 73% in 2003). This kind of movement in the indices does not come often, wherein such huge returns are attained in such short time periods. Further, most of the investors would have barely managed to keep pace with the index returns owing to the fact that while some would have entered late others would have exited early. And it is this act of short-term investing, which is precisely what affects investment returns.
In a recent poll conducted by Equitymaster, wherein we asked the readers opinion with regards to their understanding of long-term investment, it was rather encouraging to know that 31% voted for a period greater than 3 years. While the maximum number (42%) voted for a period between 1-3 years, 27% restricted their long-term investment to 1 year!
In our view, long-term investment is strictly for a period over 3 years. In fact, we, at Equitymaster, never advocate short-term style of investing as we feel that this act of getting in and out of stocks, in trying to make a quick buck, seldom pays in the longer term and is a strategy not worth practicing. Buying and selling shares at quick intervals only leads to escalation in costs for the investors, as he pays brokerage and depository charges everytime he executes the trade. Further, since the mindset of the investor is to hold the stock for a small period, it generally leads to taking decisions in haste and the investor is often caught on the wrong foot.
For e.g. an investor who has bought a stock at say, Rs 100, and the market (or the stock) goes in for some correction, the investor, because of his urge and impatience, often squares off his positions at a lower price (say Rs 95). However, here, in this scenario, the investor not only losses 5% of his investment, but also the brokerage and depository charges on either side of the trade, which could total to anything about 2%-3% of the trade value. So, the actual total loss could escalate to 7%-8%. And all this is primarily because of a short-term view. Similarly, if we look at the other side of this short-term story, the possibility of an investor booking profits at Rs 120 is very high because of his satisfaction with approximately 17% returns (don't forget the buying/selling costs).
However, while we firmly believe in equity investments with a long-term horizon, it does not mean that one should just purchase the stock and forget it. In fact, this is one aspect, which is often used to criticize the long-term investment style. It must be noted that long-term investment is not about buying a stock and forgetting about it. Periodic checks of the company's performance, the sector it belongs to and the policies pertaining to the particular sector are all necessary actions to be taken by an investor. And this is of higher relevance to investors who directly invest into equities rather than through mutual funds, where a fund manager has the responsibility of doing the above tasks and taking the necessary and timely actions and precautions. However, it must be noted that poor performance by a company for a couple of quarters, while its fundamentals remaining intact, does not warrant the stock as a bad investment option.
Further, alongside the argument of investing for the long-term, we would also like to bring forth the systematic style of investing pattern, also known as the dollar-cost averaging, wherein an investor invests a specified amount every month into equities. One big advantage of this investment style is the fact that in this, the cost of acquisition tends to average out. For e.g. If in a particular month, Rs 100 would buy 10 shares of a particular stock, and the stock price falls to Rs 5 in the following month in the normal course of market movements, the same amount next month would help one buy 20 shares of the stock. Thus, effectively, the investor would buy more units at lower price and lesser units at a higher price.
To sum it up, from the stock markets perspective, a price-earnings ratio of around 13x-14x FY05E earnings still leaves some room for re-rating of the Indian bourses. This could continue to attract Foreign Institutional Investors (FIIs) money into the Indian stock markets. It must be noted here that FII's invested over US$ 6 bn in 2003, and the inflows have continued to remain strong at the start of 2004, which further cements the fact that Indian stock market valuations are attractive. Thus, investors should adopt a long-term approach and overlook the short-term volatility to reap larger long-term gains.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 23, 2017
Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?
Aug 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
Aug 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
Aug 22, 2017
Post demonetisation, a cut in bank savings deposits rates was in the offing.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407