Is this the Right Time for Long Term Investors to Buy Stocks?

Long term investors are in an unenviable position in the Indian stock market.

Their portfolios are filled with high quality stocks and show good profits. But most of these stocks are trading at overpriced levels.

Even worse, they can't seem to find any more high quality stocks, barring a few exceptions, to buy at reasonable valuations. Most of the good ones have already gone up too much.

Thus long-term investors are not sure how to deploy their excess cash in the market right now.

The Israel-Hamas war has further muddied the waters.

If you're a long-term investor, here are your options in a nutshell...

• Buy more of the stocks you already hold.
• Put in extra effort to find a hidden gem.
• Do nothing, i.e. hold existing positions and keep extra cash in the bank.
• Sell some stocks. In this case what is to be done with the proceeds?

Let's examine these options in this article.

Buying More of the Stocks in Your Portfolio

This is a good idea if the following conditions are met:

• The stocks are genuinely high quality, i.e., you did not make a mistake when selecting them.
• The fundamentals are still intact or have become better.
• Your original idea for buying them is still valid or has improved.
• The stock has corrected due to short term reasons.

Be very careful in assessing these conditions, dear reader.

Sometimes we get carried away by the quality of our own portfolios, especially if we have done a lot of work selecting them.

This might make us think there are no better stocks in the market. There usually are better options at any given time.

Putting Extra Effort to Find a Hidden Gem

If you think you can do this, we're all for it. Go right ahead, dear reader. There is nothing more satisfying for any investor than finding the next multibagger stock.

But remember, this approach has a low probability of success. It's not because you won't or can't find multibagger stocks in India. It's because everyone else is doing the same. The competition is immense. You're probably underestimating your competition.

Chances are good that the stock you narrow down has already been discovered by the market. This doesn't mean that you shouldn't buy it. We're certainly not trying to discourage you.

If it's a fundamentally strong stock and is not expensively valued, you can consider it. But be aware that expecting multibagger returns can lead to disappointment.

The 'Do Nothing' Approach

This is useful if you're already following a clear strategy. Otherwise it's not productive.

If your strategy calls for no action at a time when markets are trading at expensive valuations, like they are now, then it makes sense to sit tight and wait for a correction. Your excess cash is safe in the bank until that time.

But if this is not your strategy, and you're still doing nothing because you don't know what to do, then it's likely that you've gone wrong somewhere.

In this case, it's a good idea to get back to the basics and find an investing approach that works for you.

Selling Some Stocks

This is fine as long as you have a plan for the cash generated. This plan could be as simple as holding on to the cash for some time as you look for better stocks.

Also, be clear about the reasons for selling. Here are some valid reasons to sell a stock...

• Your original idea behind buying the stock is no longer valid.
• The company’s fundamentals have declined.
• The stock has recently shot up to astronomical valuations that can’t be rationally justified.

Finally, consider the stock's weightage in your portfolio. If it's small part (less than 5%) then there is no need to be hasty. Even a big correction in the stock won't hurt you.

But if it's your biggest position, or one of the biggest, then you should give it your full attention and come to a decision as soon as possible.

What About Waiting for a Short Term Correction?

This would be the best time to buy high quality stocks, especially those stock you don't already have in your portfolio.

Just remember that the market sentiment is still positive despite the recent caution caused by the Israel-Hamas war. Also, the recent correction was not at all serious and the Nifty almost bounced back to its all-time high that it had made back in September.

If high quality stocks were to fall to attractive prices in a serious correction, then it makes sense to buy them at that time. In that case, you would have been vindicated for waiting for a meaningful decline in the market.

But if a correction doesn't happen soon, you could end up waiting for a long time and your excess cash will lose its purchasing power to inflation.

In conclusion, we suggest you check out our stock screener for Best Long Term Stocks in India.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...