Friday, June 19, 2009

Beating the Market – Opinion

Stock Market is a ground where players play all kind of “speculative” games to win, though they do not necessarily know who they are fighting with. Most of the retail investors try to get ahead comparing themselves with other investors and mutual fund managers who in turn compete with “Mr. Market” to enhance their reputation and performance. But they fail to understand that the fund managers and key investors have far more information, time and money to beat the market and even then vast majority of them fail to do it consistently.

Legendary investors like Buffet and Lynch did it in the past and are still doing it. But people like them are very few and the unique style they follow has not been mastered by anyone else. It’s true that they are giving tips like “Buy Low, Sell High”, “Long Term Investment”, and “Balance Sheet Analysis” etc…But what exact analysis they do before selecting a particular stock is unknown and even Buffet has admitted his failure in couple of dealings last year. So, beating the market is an arduous task and personally I would not waste my energy to match the market and few other people who are less than 0.001% of investor population.


All I would be interested in doing is to analyze the key parameters and business potential of various companies as good as I can and buy stocks that would not make me cry down the road. Of course I will be happy if my portfolio beats the market and I will take it, day or night. But taking undue risk, spending too much time brooding over how my neighbor could make more money than me or trying to become a millionaire in 2 years by investing in the so called “multi-baggers” will all be efforts in vain more often than not.

Strategy to Keep Yourself Happy

Satisfaction is an individual thing and for many people, no matter, how much return they get, still they will be found wanting. It’s natural of human beings to behave in such a manner but we have to learn quickly enough to understand that there is a cost involved in putting undue pressure on ourselves, which we do not count. Making money, getting good returns and beating the market are all desirable things but we should not lose our peace in doing that.

How many people did not curse themselves that they did not invest when the SENSEX was around 8000? If I conduct a poll (I am sure one is on the way), I am sure there will be only one answer. So, the main thing for us is to find the “Satisfaction Point” in terms of investment returns and here is my “Satisfaction Point”.


My Satisfaction Point


I get satisfied when I do the following no matter how much return I get. But believe me; I am close enough to most of the fund managers and even the market. I do not spend lot of time in searching stocks and thinking about it and I follow fairly simple approach.

I invest only when stock markets decline significantly and other people start selling.


I buy stocks that show continuously growing “Quarter to Quarter” earnings with less than the market PE.


If markets go down continuously, then I continue to average till I exhaust 60 % of my intended investment.


If the market plummets like the one we saw in March 09, then I buy for at least 30% of my intended investment.


My intended investment amount in fact rises when the stock markets reach unbelievable lows.


I look for companies that do not show any prospects for failure and businesses that can be sustained over a period of time.


I look for companies that do not have many straight competitors.


Finally I just keep watching my returns when the stock markets go up. My overall portfolio has given the return of about 30% (Started investing when the SENSEX was around 17000 last year) and I do think that’s not bad. But my new portfolio which I started investing when the SENSEX were around 8000 - 10000, has given me 60 % return which is not bad either and I am not far away from the market performance. Markets have gained 45% from 10000 levels and 80% from 8000 levels. If we calculate exactly with my investment period, market return would be somewhere around 60% to 65 % and I am quite close to it. I have not lost a night’s sleep for all this and still could come close to it by doing what I said above. Though my return is in lakhs and not in crores, I definitely think that it can be achieved with the same approach, but with increased risk taking ability and guts. If you can do it with lakhs, I do not see any reason why you can’t do it with crores.

Some people can argue that if I have invested in selective stocks I could have earned in multiples which I agree. Even I bought “YES BANK” for Rs.42 and now it is traded for Rs.133 with an increase of 216 %. But my portfolio contains other stocks too which did not appreciate as much as stocks like Yes Bank. For example, I bought Asian Paints for Rs. 750 and now it is Rs. 1100, an increase of only 46%. Of course there are so many ifs and buts that could have made a difference. If I had bought HDIL when it was Rs. 62, I could have made 500 % return, but I did not want to invest heavily in the real estate sector. Likewise, there are so many examples. Aban Offshore was available for Rs. 220 and it went up to Rs.1100, an increase of 500%. But you can’t rely on just one stock if you are a serious investor and that’s the reason my portfolio return is 60 % which is in line with the market performance. That’s a good enough return for me for the time I spent and I can definitely say that’s my satisfaction point.

Conclusion: Make sure you do all the right and simple things in making a buy decision and continue with your defined approach. Do not get worried about the portfolio performance by comparing yourself with other investors or fund managers. If you buy when others are selling and remain cautious when the market bounces back, then you have a fair chance of getting a market return if not beating it. Even if your portfolio gives 40% overall return and it is 15 % lesser than market return, there is no need to lose your sleep over it as your portfolio still returned decent profit which is higher than what you could have earned in other form of investments. So, the point I am making is, whatever return we get after making a decent effort should satisfy us and I refer it as the “satisfaction point”.

Kumaran Seenivasan

http://www.stockanalysisonline.com/

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Sunday, June 7, 2009

Buy and Hold Approach - My Personal Experience

The Title "Buy and Hold" has been the buzz word in most of the stock market books, articles and related speeches. I am sure many people have reservations about it and I would like to share my personal experience regarding this. Does this approach make sense? Does it really give decent returns?. My answer to the above two questions is a resounding Yes. Like most of the retail investors, I have read many books and articles and each one contained approaches starting from technicals and trading to speculation and fundamentals. But the legends who have made billions always advise investors to buy good stocks and hold for a long term.


We all know that SENSEX reached 21000 in Jan 2008. But all of a sudden, the market euphoria started to recede and markets reversed the trend. In the current phase, I started investing when the SENSEX came down to 17000 thinking that the markets would not go down below 15000 or 16000. This time it was different and we have witnessed one of the worst recessions in history. Many companies which were once considered to be invincible’s have ceased to exist. People panicked and economic activity came to a halt. SENSEX started reaching new lows every day.

Since, I have invested some money when the SENSEX was at 17000, I had no other option but to average the stocks I had by buying continuously as stock prices reached new lows. But what I made sure was to buy the stocks that I believed would perform well over a long term.

Readers might ask why the hell I did not sell all those at that time and buy when the SENSEX came down to 10000 levels repeatedly. Of course I would have done that, had I got the Wisdom of Solomon. Unfortunately I did not and in fact never wanted to predict the impossible. Because, if there are 10 individuals involved in the market, then it is not that difficult to sense the mood of the people and act accordingly. But the stock market is a place where millions of individuals buy and sell and I do not think anyone can predict what would or what would not happen. So, I continued to buy stocks and backed my stock selection as well as the "Buy and Hold" approach.

So, I invested in good companies and waited for appreciation. I sticked with my portfolio of stocks and continued to accumulate but I stopped investing at 13000 as I feared that markets would go down further. It in fact came down to 8000 levels couple of times. During the downtrend, some of my stocks declined even 75 % but I believed that it would eventually go up and at least reach my cost value. I started buying some stocks again at 9000 levels but that’s a separate portfolio. I always wanted to check the performance of my old portfolio. In short I started buying at 17000 and continued to average till 13000. My portfolio was down almost 50 % when the SENSEX was around 8000. Still I believed in full recovery.

Finally the time came. Recession started slowing or at least people believed that way. Bad economic news stopped coming and markets made a rebound. Indian general Elections gave the verdict that markets and investors were looking for. People started buying in heaps and Foreign Institutional Investors pumped in as if there is no tomorrow. All the stocks in my old portfolio started moving up. It has now given a 20% return which means, the portfolio has registered 120% growth from 8000 levels. So, the verdict is "Buy and Hold" approach definitely works and it will give me good returns in next 5 years.

Alternative Approach

There are still people out there to question my wisdom. Of course I too know that I could have stopped buying at 16000 and invested all my money when the SENSEX was 8000 or I could have sold all my stocks at 13000 to limit my losses and ploughed back that money at 8000 levels. There are so many ifs and buts. But according to me, if you are not sure then just hold all your stocks. Never sell stocks for a loss if you believe in those stocks. If you think you have made a mistake in stock selection, then it makes sense to sell it and buy other good stocks. Otherwise it is always good to keep rather than register a loss.

There might be a select few who could have sold at 16000 levels and invested again at 8000 levels and by now they could have made millions. But the percentage of people who does that will not even reach 0.0001 %. So, why bother about them. Just believe in your stock selection and continue to accumulate irrespective of market movements. Hold it till you get the decent returns and sell it as soon as it reaches your expected returns. If not at least we should have the ability to sense the downtrend and sell it before that.

Conclusion

There are many approaches one can take but the approach which is safe with the potential of good return is "Buy and Hold". To do that we need to do couple of things. One is to make sure that we select stocks that are essential to the economy and livelihood with strong market presence and another is not to buy at peak valuation. If we do that, then most often than not, one can reap decent returns if not the best.

Kumaran Seenivasan

www.stockanalysisonline.com

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Disclaimer

This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
any decisions that you make based on the information provided here.
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