WHY DO I INVEST IN STOCKS?
The stock markets seem to have
run out of breath. Ideally, the markets would have liked Mr Modi to have
performed miracles in his first three to four months, what the previous
governments have not done in over six decades. We all want everything in the
shortest possible time.
Similarly, we all want to pile on
to the stock market wagon when everything seems rosy, the markets are up and we
have suddenly fallen in love with the markets after hating it for long. There are emotions at play here which give
you the environment of a casino. Like in a casino they pump oxygen, to ensure
that you do not feel tired, we have our TV channels, magazines and media
exhorting you to go out and buy. Suddenly, IPOs make their appearance and the
mutual fund industry rolls out one new (name only) scheme after another. And we
turn off our thinking caps and succumb to a product or concept that we did not
even think about. It is as if we spent two years thinking about ten stocks and
after that invested in to the eleventh one without a thought.
As an investor, the first thing
one needs is to separate emotion from reason. Emotional approach is a sure way
to lose money. A method and discipline in sticking to it are the pre-requisite.
Having a time horizon for an
investment is the key to successful investing. For example, if you are a day
trader, you do not care much about long term and your focus is clearly on the
price volatility during the day. By and large, this day trading is done by
people using charts or some mathematical algorithm that is driven by a
computer. As a day trader, you do not keep any open positions after the market
hours. You pack your workshop and sleep on zero risk. Ideally.
On the other extreme, I could be
an investor with an infinite time horizon. I buy stocks with money that I am
unlikely to need in the next twenty or fifty years. So here, I have to be
patient in terms of research as well as buying at a reasonable price. Here, I have to use crowd psychology to my
advantage. I need rigor and discipline. I cannot be swayed by emotion. Analysis
is everything.
One more trading approach is to
place some bets on events- For example, I could be buying Oil company stocks
(PSU) in the hope or expectation that there will be decontrol of oil. Here I am
betting on a huge re-rating. Or I could bet on an event of the GOI realising
that it should get out of running businesses and hand over the PSUs to the
highest bidder.
And there is the other approach
of the SIP in direct equity (of which I am an advocate) which serves most
people well. The effort you need is to identify a handful of great companies
and a guess on their survival for the next twenty to fifty years. Once
companies are identified, and then keep buying without any worries. And the key
is not to worry about the noise but stick to the discipline and not miss a
single instalment of buying. I know of people who start with enthusiasm and
then one fine day, just give up on it because they feel gloomy about the
weather or someone has told them that the markets are tumbling and the outlook
is not good.
Often, we can use crowd behaviour
to our advantage. Many people say ‘trend is my friend’. It is like the old days
approach. We see a queue and join it, thinking that if there are so many people
standing in a line, there must be something at the end of it. Each path has its
own destination and it is best to stick to ours.
For me, investment is a long term
game. I always think that the short term mood of the crowd is one of unbridled
optimism; I would like to wait out their optimism. I am not in a race with the
fund manager at a mutual fund who is worried everyday about his NAV and peer
comparison and claims to have a long term horizon. I like my freedom to buy at
my price and value and not be part of the queue that is buying first and then
finding out what they bought.
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