Dec 28, 2004|
Investing: How long is long-term?
The Sensex breached its previous high of 6,498 yesterday and closed for the first time ever above the 6,500 levels. However, this now does not come as a major surprise as we have been in a ‘bull market’ for quite some time now with the indices hitting newer highs almost every day. And this can largely be attributed to the sustained FII inflows into Indian equities, which are now at US$ 8.4 bn since January 2004. With the indices scaling newer highs and all round optimism prevailing in the market, it is not uncommon to see stocks hitting multi-year highs and neither it is difficult to find stocks that notch weekly gains beyond any rational explanation. It is during such times that the behaviour of even the most disciplined of investors tends to get swayed, in the process affecting his investing principles. One such principle is that of the ‘investment horizon’.
In this backdrop, we had recently conducted a poll on our website asking our readers, “In your view, long-term investment is for…” It was somewhat encouraging to see the results, as a majority (55%) of those who voted believed that long-term investment is for 1-3 years, while 30% vouched for the ‘more than 3-years’ option.
As far as our stand is concerned, we believe that long-term investment is for a period of over 3 years. We believe that the act of getting in and out of stocks 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 every time the trades are executed. 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.
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 exactly ‘passive investment’.
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. While poor performance by a company for a couple of quarters, with no change in fundamentals, does not necessarily warrant the stock as a bad investment option, at the same time it is important to note what Warren Buffet, the legendary investor, has to say, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Further, investment allocation based on one's risk-return profile, avoiding greed and fear, remaining focused on long-term investment, refusing to get hypnotized by market perceptions, keeping faith in one’s investments and avoiding giving effect to irrational, hasty and irresponsible decisions are just some of the qualities required to be successful in equity markets.
While innumerable stocks, most of them small-cap and penny stocks, continue to provide unjustifiable returns in the short-term, the risk attached to such stocks is huge. It must be noted that these stocks also have the potential to wipe out most of your investments before you realise and decide to take the necessary action. To conclude, it is worthy to note another enlightening statement by Warren Buffet, which he said with respect to investing in software companies during the tech boom, “… we miss a lot of very big winners but it also means we have very few big losers.... We're perfectly willing to trade away a BIG payoff for a CERTAIN payoff.”
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