When you invest in equities, you invest for the long term. Write this down and repeat it to yourself EVERYDAY of your investing life. It is worth its weight in Gold. Oops worth its weight in Equity. That’s more valuable.
So the question to ask / consider HAS to be LONG term in nature, right? Well, people end up asking the wrong questions. If your questions are short term, can your answers be long term? Let us look at the theory of investing. What is the EDGE that I have while investing – even over a seasoned player like a mutual fund scheme run by a brilliant and humble manager like Sankaran Naren. Normally these are the advantages for anybody:
- Information advantage
- Analytical advantage
- Time Frame advantage
- Public scrutiny / Trustee scrutiny advantage
- Philosophy advantage
- Time of holding advantage
- Balance advantage
I have to be kidding myself if I think that I can get any information or analytical advantage over a mutual fund. In theory no big company management will reveal more to me than to a big asset management company. Also Naren has a big team of research people who can check and validate information given by the management of a company, and I am a simple single man. When I do a post just on Information / analytical advantage I may break some of these myths, but for this article, lets say N scores over me.
I can hold a share for the rest of my life, but N has to be worried about his portfolio balance. Some because he is answerable to a team of people, and some because of the Law – one company cannot be more than 10% of his portfolio. He cannot move into more than X% in cash – I can move to 99% in cash in case I choose to. He has to maintain a balance in his portfolio according to a written document, I do not have to. Of course this can sometimes be a disadvantage too, but largely it works out to be an advantage.
When I ask questions like ‘what is the edge that this company has’ while investing, I am asking for the long term advantage of the company. So lets talk of 3 companies and the questions one is supposed to ask. Asian Paints, Hdfc, and Cholamandalam Investment and Finance.
When Demonetization happened most people rushed to ask: “What will demonetization do to the NEXT 2 QUARTERLY results”. So obviously AP, Hdfc, and Chola looked like good sells. So if you were a TRADER all these shares were a great sell on 9th November. If you take a one month view, I AM SURE all these 3 shares would be down. Let us assume that they are down by 15% from 9th Nov to 18th Dec. Fairly obviously AP could be 15% down, Chola say 19% down and Hdfc about 2% down. WHICH MEANS IF YOU HAD SOLD ON 9TH, YOU are sitting on a profit TODAY provided you buy it today. However, what if the market goes down even further from here? So what to do?
Now go forward to 20 Jan 2017, maybe all the 3 shares are at their pre Nov. 8 prices….AND YOU HAVE STILL NOT BOUGHT…you were waiting. Did it help? In fact if you see 3 months ago was a BETTER TIME TO SELL AP, – 1250 was the peak for Chola too. Should you have sold it then? Yes of course, but we are talking about it TODAY, exactly 3 months back I had no clue that Chola and AP were good shares to sell. I MISSED THE STEEPEST FALL, and I am sure that I would miss the SHARPEST RISE TOO.
Instead if you had asked ‘if there is demonetization will AP, Chola, and Hdfc lose their edge? will their business slow down or WILL THEY GO OUT OF BUSINESS? What has helped them be in business for such a long time?
The answer would have been :”Yes in such times their one or two quarters could be bad, but their overall ability to do business will not be lost”. So assuming you had 30,000 shares of Chola, you could have gone and sold 5000 shares on 9 Nov (remember you still missed the boat of selling at 1240), and bought it back today. It would have given you some short term gain of 20% – and you would still have the shares in your portfolio. No FM can think and act like this.
The other edge I have is time. I bought Mrf, Chola, Hdfc, etc. in the 1980s, 90s and in the 2000s. I traded too – but about 5% of the portfolio. Sell at a higher price, and buy at a lower price – what is called delivery based trading.
Large caps like AP, Hdfc, Hdfc bank, Chola, also MISPRICE themselves in the market. If you can catch 2/3 times of mispricing you can make some quick trading money – but that requires tremendous patience, logic, and ability to see action happening, but not participate in that. Not easy my friend. Not easy.
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