Sunday, October 12, 2014



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.

No comments: