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

ICICI Prudential Dynamic Plan Invest Online

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   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...

Birla Sun Life MIP II Savings 5

  Birla Sun Life MIP II Savings 5 - Invest Online   Have you traditionally been a debt investor but now wish to test waters in equities? Then, debt-oriented funds such as Birla Sun Life MIP II Savings 5 (Birla Savings 5), which have limited exposure to equities, may fit your requirement. With a five year return of 10.5 per cent compounded annually, the fund managed a good 3-3.5 percentage points more than its benchmark Crisil MIP Blended Index, as well as its category average. The fund appears well poised to capitalise on a falling interest rate scenario and has increased the average portfolio duration of its debt instruments in recent times. Suitability Birla Savings 5 is suitable only for conservative investors. If you want to make a beginning in equities and cannot take any short-term declines in your stride, then this fund will suit you. If you are already an equity investor and want to use a debt-oriented fund merely as a diversifier, then you may prefer peers from the HDFC and Re...

Mutual Fund Review: Reliance Regular Savings Balanced

Reliance Regular Savings Balanced fund has shown great resilience during market crash After a shaky start, this fund has established itself as a strong contender in this space. In the past three years it has ridden the market well by not only delivering during the market run-ups but also displaying resilience during the crash. In 2008, it witnessed the second lowest fall among its category and last year it was amongst the top three performers with a return of 76 per cent (category average: 61%).   The poor underperformance in 2006 can well be credited to the low equity allocation of the fund, which stood at just over 10 per cent for only four months that year. Though the fund has the leeway to go up to 75 per cent in equity, it has never touched that limit. In fact, it has exceeded 70 per cent in just five months in its entire history. During the crash of 2008, the fund managers had no problem going right down to 54 per cent (equity exposure). Fund managers Omprakash Kukian and A...
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