May 6, 2008|
Investing: All's in the process
With the Indian stock market at their volatile best (or worst), these are indeed difficult times for investors. After the benchmark index hit its all-time high of 21,000+ in January this year, it has since witnessed a significant correction and volatility has taken centre-stage. At every rise, participants take the opportunity to book profits, with sentiment being as yet apprehensive. In such times, what could be the best strategy to use as a long-term investor?
Well, we firmly believe that if one sticks to basics, it is not difficult to earn good returns from equities. The caveat, of course, would be that one has to have the patience to stay invested over a longer period of time, and, most importantly, one should have the ability to keep one's emotions in check. That is, to put it simply, not get carried away in a bull market and buy stocks at obscenely high valuations, and also, not get fooled into thinking negatively in a downward phase, when fear is the primary emotion that drives the market and keeps stocks at lower levels. To use a famous quote from Warren Buffett, the investing legend, "We only attempt to be fearful when everyone else is greedy, and greedy when everyone else is fearful." Thus, being 'long-term greedy' is the best attitude to have in any sort of market.
Read our discussions on Warren Buffett's letter to shareholders
We run through a brief process of investing here. We are of the firm belief that if one follows a disciplined process of investing, one can accumulate significant wealth over the long-term.
Use mutual funds to ace falling markets
Assess your time horizon - are you a trader or an investor?
There is a significant difference between these two classes of people. The word 'investor' is arguably the most misused term in the stock markets. Some people are into share trading as a business, and routinely move into and out of stocks within a time frame of a few hours. These are called 'traders'. 'Investors', on the other hand, would typically be people who, after thorough analysis, put money in stocks and hold on for longer periods of time, ranging from 3 years to 2 decades. Thus, you must understand exactly where you fit in.
If you are an investor, do you have patience and the ability to keep emotions in check?
If you have identified yourself as belonging to the investor camp, then you should understand that investing in stocks is not that simple. It takes a lot of patience to earn good returns. In a bear market, stocks, despite showing good financial performances, do not necessarily deliver the same returns. You have to keep your confidence in the company, and be patient, as over a longer period of time, the markets do ultimately reward good financial performances. However, most importantly, you must be able to detach from the 'noise' that often travels around in most markets. In simple terms, you must keep focus on business fundamentals, regardless of whether it is a bull or a bear market, and sell the stock if it crosses your target price, and buy if it becomes attractive enough.
Have you done your homework before investing your hard-earned money in stocks?
Before putting money into stocks, it is extremely important to first study the companies that one wishes to invest in. Only if one is aware of the company, its business model, management capabilities, market share, sustainability of growth and stability and consistency in earnings, he must take the plunge. And one must understand the downside as well, before ascertaining the upside. This step, we believe, is more important than actually investing, because the investor is actually aware of where he or she is putting his or her money and at what cost. Once again, it is the process of investing that is of utmost importance. If you do not have the time to do such a study, it is best left to the experts to handle this, that is, investing in a reputed mutual fund.
Keep on following up...
And finally, you must keep a constant track of the companies that you invest in. Regardless of how markets behave, bullish or bearish, you must keep an ear to the ground and accordingly act. For example, if you have invested in Company 'X', having confidence in its future prospects, and the company does not perform in line with your expectations, study clearly as to why this has happened - was it just a one-off difficult year for the company, or has something changed fundamentally that the company might not perform well in future as well. At the end of the day, it is your hard-earned money that you are investing. If you have worked hard to earn that money, why not do so to see your money grow, rather than wither away?
The above is an indicative process that one should use while going about investing in equities. We certainly believe that it is necessary to invest according to a disciplined process, and this is the best way to make money in any market, bull or bear, across economic and market cycles.
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