Showing posts with label Stock Market: Act like Poor to Become Rich. Show all posts
Showing posts with label Stock Market: Act like Poor to Become Rich. Show all posts

Saturday 5 September 2009

Stock Market: Act like Poor to Become Rich

How many people bought stocks when the SENSEX was around 8000? If you ask me, Yes, I bought some but not enough to tell you that I have achieved something in stock market. But I am happy that I bought something at least.

So, my point here is, why people show due diligence in price while buying household and other articles but do not show same kind of prudence in buying stocks? When people go out for shopping, they try to reduce the price as much as they can but not in case of stocks. I do not know if people would have avoided buying if there was a furniture or cloth sale with 1/8 of the price. Stocks were so cheap and many small and mid caps were available at 1/8 or 1/10 th of the price a year ago and most of the retail investors avoided it. People can ask if there was no buying then how the market went up. Market went up not because of retail investors but because of Mutual Funds, Insurance companies and Institutional Investors. May be the retail investors who bought mutual funds exactly in the first week of March, 2009 would have benefited to an extent but definitely not to an extent of what they would have got if they had bought stocks during the same period.

So, here is my rule number one.

Rule 1: Buy stocks (Of course good companies) without any hesitation whenever market is unjustifiably low. If you are in doubt, just ask yourself if you would buy cloths or furniture or laptop or house if the price is lowered 1/8 th or 1/10 th of the original price. If the answer is yes, then you should go ahead and buy stocks whenever it is available at extremely low prices. In essence retail investors should act like poor while buying stocks. If you act like poor and buy stocks, only when it is available at extremely low prices, then I do not think there is any need for analyst advice or recommendation. You just need the guts to do that.

Reason:

1. Extraordinary profit when the market is up.
2. Limited downside potential.
3. Some protection even if you have bought bad stocks.


Recent Rally

It is true that SENSEX has moved 40 % higher than what it was 6 weeks back. I feel that’s more to do with abundance of cash with fund houses and institutional investors rather than any fundamental difference in the economy. We are still getting bad news around and companies are still posting average quarterly returns with poor future guidance. Unemployment is still raising and housing market is still getting worse. Credit card default is mounting. But why the heck stocks markets moved up so fast? Of course some companies have exceeded market expectations but those are exceptions rather than rule.

I have a feeling that the market has gone up so fast and it is not a healthy sign. If the market has gone up in a measured way, then we can be sure of its upside. May be a 20 % upside in such a short time would have been appropriate given the future economic growth expectations. But 40 % in such a short time does not offer any clue to retail investors about upside or downside. Moreover it gives false hope to people and retails investors start buying after mutual funds and institutional investors create almost an artificial upside in the market and eventually they stand to lose money when the market pulls back to healthy numbers. I might be wrong here and markets might move up continuously from here on and I even wish so. But over heating market always destined to get cooled off and investors have to be at least cautious if they can’t resist buying at the peak of a rally like this. So, here comes my rule number two.

Rule 2: Do not buy stocks if the market goes up (Rally) too quickly in too short time. If you can’t resist buying in the rally, at least be cautious and safeguard your investments by investing in good stocks that has not over heated. Buying at the peak of rally might minimize the net returns over the long term.

Reason:

1. To safeguard the investments from a potential fall
2. To Maximize the net returns in the long term
3. Some protection from buying artificially inflated stocks


http://www.stockanalysisonline.com/2009_04_01_archive.html