Stock market strategy for the winners

Stock market strategy for the winners
by Tejinder Singh Rawal

The recent fall of indices resulted in many speculators and day traders losing their shirts. Crores of rupees worth of capitalisation was lost in a week. The momentum investors who were jubilant at the rising charts during the last six months were suddenly cornered, and many of them lost a substantial part of the gain that they had made. This has prompted me to write about the strategy that most successful investors have followed to beat the street irrespective of which way the indices were going. An investor who plans his investment prudently, keeping a long-term horizon in mind, will succeed even if the indices go down. Here are the suggestions.

Invest for the long term: When Keynes said, in the long run we are all dead, he was certainly not referring to the stock market. The success in stock market largely depends upon your ability to stay invested for a long period. It is strange few people heed this advice! Most investors in Indian markets continue to be short-term investors, and speculators. Day trading is an important characteristic of Indian stock markets. Short-term investment is nothing more than a speculation, and you can rather try your luck at horse races, or at casinos where the probability of success is higher!

Do not time the market: A long-term investor does not try to predict the direction the market is going to take. You should not wait for the market to rise or fall before you decide to invest. Since as a long-term investor you will be focussing on the value of individual share, rather than the frenzy of the market, market direction should not be a cause of concern, as long as you are sure that the investment you are making is attractive, and has a sufficient margin of safety built into it. As a long-term investor, you should not hold your cash, waiting for the market to fall, so that you can invest when the prices are low. You should know the time value of money, which means that the early you invest the higher will be your return. Moreover, if you invest regularly, you are able to take advantage of 'rupee averaging', which takes care of market fluctuations.

Do your homework: As a long-term investor you should know the fundamental value of the share you are buying. Remember that PE ratio is not the acid test of investment. Low PE ratio does not on its own make a particular company worthy of investment, and high PE, per se, does not make a share less attractive. Other factors like the quality of management, break-up value of the share, debt-equity ratio, interest coverage ratio are equally important.

Do not invest in penny stocks: Penny stocks and junk scripts look attractive to the investor when the indices are rising, since the price of these shares usually rise faster than the rise in prices of other shares. However, when the market falls, the investor is left with junk, which has no value. As a matter of principle, you should invest in stock of the only such companies whose fundamentals are known to you. Do not depend on tips, however reliable the source of tip may be. Most of the tips are generated by people with vested interest. Even when the source of the tip is genuine, the time frame the issuer has in mind may be different. If you are tempted to act on a tip, study facts before you decide to go ahead.

Do not panic: This is very important. More money is made in stock market by remaining inactive. It is foolish for a long-term investor to be excited or subdued by the market ticker. CNBC channel is for the short-term traders and day-traders, do not let the opinions expressed there affect your investment decision. If you are confident your investment is fundamentally strong, every fall should give you an opportunity to buy rather than sell. Of course, while you do that keep in mind the principle I have narrated in the next paragraph.

Don't pull your flowers and water your weeds: This strong advice comes from Warren Buffet, the most successful disciple of Ben Graham. The greatest mistake most investors make is to sell the shares that have appreciated, and hold the ones, which are giving a negative return. The investment strategy should be the other way round; you should sell the losers and let the winners ride. I do not mean that you should sell every share that has depreciated. The right course is to keep pruning your field regularly to identify the weed so that they could be removed, and to identify the flowers that should be watered as long as their fundamental value is below the prevailing market price.

Do not invest in the company and sector whose business you do not understand: If you can understand a business and you find value there, invest. Do not be tempted to invest in industry about which you do not have much idea. While there is so much money to be made in technology shares, yet if you do not understand the business, it is better you do not go into it. My personal investment philosophy is to invest in the business, which I would be comfortable running on my own. I apply the same principles even when my investment is as low as 10 shares.

Do your own research: Security analysis is not as difficult as it may seem. You do not have to be a qualified analyst to do the analysis. A basic book on reading the financial statements of a company will be a great investment. When I say that more money is made by being inactive in the market, I certainly do not mean that you should invest and forget. On the other hand, you should keep reviewing the performance of the company you have invested in. If there is a fundamental change in the situation of your company, which has altered the premise based on which you had bought the shares, decide if the change warrants a change in your portfolio.

These principles have been perfected by masters and are time-tested technique for long-term investment in the market. While this is not the only way one can invest, this method is more scientific and if applied consistently, it would make the process of investment a less risky proposition with higher margin of safety.

You can reach him at: tsrawal@tsrawal.com


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