Sunday, 5 February 2012

Patience - a fundamental investment discipline to have a lot of.

There is only one strategy that works for value investors when the market is high - PATIENCE.

The investor can do one of two things, both of which requires steady nerves:
1.  Sell all stocks in a portfolio, take profits, and wait for the market to decline.

  • At that time, many good values will present themselves.
  • This may sound easy, but it pains many investors to sell a stock when its price is still rising.

2.  Stick with those stocks in the portfolio that have long-term potential.

  • Sell only those that are clearly overvalued, and once more wait for the market to decline.
  • At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.

But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

As for the hot stocks, when they take a hard hit the investor is cornered.  If the stock is sold, the loss becomes permanent.  The lost money cannot grow.  If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall returns.


When you buy wonderful companies at fair or bargain prices, you can often hold these forever.  The earnings power of these companies ensure that your returns will be positive over the long term.  You often do not need to sell, even if these companies are slightly overvalued as their intrinsic values in the future will probably be higher than the present prices.  When the share prices of these wonderful companies go down in tandem with the market corrections or bear markets, you often have the chance to buy more at lower prices.  The only action you should avoid is to buy these wonderful companies when they are trading at obviously overvalued high prices.  A wonderful company can be a bad investment when you buy it at a high price.

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