Skip to main content

Investment Strategy: How to refine your judgement while investing?

KEYNES, the most talked-about economist in these days of bankruptcies and bail-outs, once said, “markets can remain irrational longer than you can remain solvent.” While this theory is applicable to both bears and bulls, the underlying message is undoubtedly clear that rational investors can succeed if they can keep irrationalities out. The broader investment decision of whether to invest in equities as an asset class at a given point in time should depend on the prevailing stock market activity. While I also agree with the learned view that a retail investor should not try to time the entry and exit in a particular stock, I strongly argue that every investor can time the market to enter/exit equity markets.
Stock markets historically have peaked at a time when interest rates also peaked or tended to peak due to higher demand for market related credit fuelled by over confidence. There is an example of this not so “knowledgeable” investor friend who sold all his equity investments whenever the interest rates moved up and he used to then shift to traditional FDs and income funds. This investor started moving his fixed income investments into equities in the early days of this decade when the interest rates were at its lowest. The same investor again started shifting from equities to FDs in mid 2008, although he missed the peak of the markets in January 2008. Today this conservative disciplined investor has had the last laugh again while conceding that he has no great knowledge of economics. What moved him is sheer common sense and a strict control on emotions.

During the 25 years that I have spent in the market I have often noticed this correlation between interest rates and market peaks/troughs. I have no hesitation in siding with this investor who uses less of market information and more of common sense to time the market when one is bombarded with an unprecedented supply of market “information.” If the interest income is relatively high compared to the low risk associated with the product then there exists an opportunity to shift from equity depending on one’s risk appetite.

In contrast, I have this highly educated friend of mine who was brilliant enough to spot this particular multi-bagger stock when the price was Rs 150 around 10 years ago. When the price went up to Rs 1,500 in 2007 he decided to wait despite being advised to sell and book profit, at least partially. The stock started going down in the bear market in 2008 and after waiting for more than year through a bear market he got tired and sold the stock at Rs 200 while claiming that he was able to protect his capital. This is a mistake many people make particularly when they are credited with identifying a multi-bagger stock. Such investors most of the time fail to exit at a superior profit as they get emotionally married to the stock and refuse to recognise an impending market peak/trough. Contrast this with an investor who purchased the same stock at Rs 500 and sold at Rs 1,100. Wrong entry and wrong exit but made huge profit compared to the other friend who entered right and exited wrong.

While it is relatively easy to spot market cycles through a disciplined approach, it becomes extremely difficult for retail investors to do stock picking due to an oversupply of unreliable information. Unscrupulous manipulators abuse information to take unlawful advantage in the market often trapping the innocent investor.

There are two universes of stocks in the market. One with high liquidity and that are covered by researchers from many institutional brokerages. Due to continuous and intense competition between analysts it will be an efficient market for these stocks by all conventional academic definitions of efficient market. The theory says that in such a universe of stocks the market price reflects all publicly available as well as private information making it difficult to make any superior return from any research or information/analyst’s report. In this universe of say Nifty stocks one should try to just time the market cycle rather than pick stocks unless there is a definite strategy behind that.

However, the trap lies in the large universe of so-called mid caps and small caps in which there will not be any serious competition between analysts and hence the information, both public and private, may either be unreliable or misguiding. Retail investors should only buy stocks of companies that they know from this group. If an investor doesn’t know either the business or its management how can that investor be a co-owner in that business? Hence a disciplined investor who knows his stock will only be successful in this universe. Many investors who start equity investment with goals and discipline often end up as speculators but will never accept the fact. Very few want to be successful traders. Every investor wants to be a successful investor and many of them turn into unsuccessful traders losing their hard earned fortune to hungry brokers.

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

FCCB buyback

WITH dismal share valuations causing bondholders to redeem, and not convert their foreign currency convertible bonds ( FCCBs ), which until early this year were regarded as one of the most preferred options for raising corporate debt, suddenly seem to have become millstones around the necks of issuers. It is the redemption pressure on cash-starved issuers, coupled with the need to preserve liquidity by mitigating further forex outflow, which seems to have prompted the Reserve Bank of India ( RBI ) to issue the circular permitting buyback of FCCBs. As per the circular, issuers can now buyback FCCBs under the automatic route up to any limit out of existing foreign resources or by raising fresh external commercial borrowings (ECBs,) if effected at a minimum discount of 15% on the book value. Further, FCCBs up to $50 million can be bought back with prior RBI approval out of rupee resources representing “internal accruals”, if effected at a minimum discount of 25% on the book value. I...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now