Don’t time the market

It is more important to spend time in there

The law of demand tells us that higher prices bring down demand and vice versa. But, there are exceptions to this rule, the biggest being the stock market — as prices go up, more investors flock to the stock market, and when the markets fall and stocks become cheap, more investors want to leave the stock market.

Counterproductive as it is, most investors thus end up buying when prices are high and selling when prices are low.

Do not follow the herd
Investors typically follow what everybody around them happens to be doing - buy if everyone is buying, sell if they are selling. But, this does not help because investors are essentially trying to enter or leave the stock market based on their perception of where it is headed. In short, they are trying to time the market, something even professional investors would agree is very difficult.

Invest regularly
A number of experts have been shouting from the rooftops since the Sensex touched 6,000 that the market is overvalued. But, that didn’t stop the index from rising 250% to cross the 21,000 level or falling by around 30% from that level. And now, when the markets are around 16,000, the experts seem to be suggesting that it’s the right time to buy, as stocks are available at lesser prices.

How does an individual protect his or her investments from volatility in the stock market? The answer lies in the age-old adage, “invest regularly.” How does regular investing help? The simplest answer seems to be that an investor can keep investing even if he does not have a large amount of money to invest. Also, with regular investment, money earmarked for investment does not go towards spending.

Regular investing also brings “cost averaging” into play. Say an individual invests Rs5,000 to buy 100 shares of A Ltd at the rate of Rs50 per share. Some time later, say the price drops to Rs25. Now if he decides to invest Rs5,000 again in A Ltd, he ends up buying 200 more shares. Now he has 300 shares of A Ltd. Thus, his average price per share now is Rs33.33. Hence, he can make a profit once the share price goes beyond Rs33.33 and doesn’t have to wait till it reaches Rs50 again.

Mr. Market and YOU

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.' This was how Benjamin Graham defined 'investment'. And rightly so! At these times, when the markets are witnessing high levels of volatility, it becomes an ardent need for stockbuyers to understand this difference between a speculative activity and investment. It requires just a misguided step for investor to turn his investment venture into a speculative misadventure.

In this regard, Graham's parable of 'Mr. Market' stands in good stead. This is, probably, one of the best metaphors ever created for explaining how stocks can become mispriced. Through this parable, Graham asks investors to imagine a non-existing person called Mr. Market who is your (investor's) partner in a private business. He appears daily and names a price (stock quotation) at which he would either buy your interest or sell you his. Now, despite the fact that both Mr. Market and you have stable business interests, his quotations are rarely so. At times, he falls so ecstatic that he sees only the favourable factors affecting business. And this is the time he would name a very high buy-sell price because he fears that if he does not quote such a high price, you would buy his interest in the enterprise and rob him of imminent gains.

And then there are times when this very Mr. Market is so depressed that he sees nothing but trouble ahead for both business and the world. These are the occasions when he would name a very low price, as he is terrified that if he does not do so, you would burden him (sell him) with your interest in the business.

Now, Graham says that if you were a prudent investor or a sensible businessman, you would not let Mr. Market's daily communication determine your view of the value of your interest in the enterprise. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But at the rest of the time, you would be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

What Graham tells investors through this parable of Mr. Market is that they should look at market fluctuations in terms of the Mr. Market example. They should make these fluctuations as their friend rather then their enemy. This means that they should neither give in to temptations that rising markets bring with them nor should they think of doom when the markets are falling incessantly.

Coming back to the abovementioned definition of an investment operation, investors need to have a long-term (two to three years) perspective when making their investment decision. Only then would the promised safety of principal and an adequate return accrue to them. Now, the term 'adequate return' typically varies from investor to investor. A high-risk investor would demand a high return from his investment from the extra bit of risk he is taking. On the other hand, a low-risk investor would settle for a relatively lower return. Having said that, in a rising market, expectations tend to be on the higher side without a fundamental premise. Here is where 'Mr. Market' could mislead you. If you believe that 15% per annum is an 'adequate return', then stick to that irrespective of whether it is a bull market or a bear market. Otherwise, you are changing i.e. risk profile is changing, which is not required.

As Graham says, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism.' Happy investing!

With index funds, choppiness won’t hurt

The passively managed funds are particularly good for building a milestone corpus Equity markets have undergone quite a bit of consolidation in the last few weeks. For a retail investor,stock-picking now seems much riskier than earlier.

That said, the low levels of current markets make many an investor wonder if they can enter at these levels. With a limited expertise in stock selection, it is a tough task to get the value buys right. Also, getting stuck to poor performers can be pretty disheartening when the bulls take charge of the market again.

Equity mutual funds, on the other hand, become somewhat unpredictable in their behavior in such turbulent times. Even if the investor wants to enter the markets at a certain level, the fund that he invests in might choose instead to stay put in cash. When taking a call on the overall market, therefore, index funds turn out to be a better choice for investments.

Index funds are passively managed funds and replicate the movement of an index like the BSE Sensex or NSE Nifty or any sector specific index without attempting to beat it. These will give the upside from the expected bull run in the exact proportion of the market movement and will not lag or lead the index. There is a common misconception that funds with a passive management style provide lesser returns as compared to actively managed equity funds. However, a large proportion of diversified equity funds underperform the index over long time horizons.

The following table shows the performance of equity mutual funds vis-à-vis the market indices.

Index returns (%) 1 yr 2 yrs 3 yrs

BSE Sensex 21.86 21.63 35.95

S&P CNX 26.08 21.88 34.18

NiftyCrisil Equity 17.46 12.49 28.65

Unfortunately, very rarely will you find any distributor recommending index funds, thanks to the low commissions they offer — another reason few people are aware that index funds so much as exist.

Most index funds have neither entry load nor exit load (beyond a minimum holding period), which ensures that the entire invested money is deployed in the equity markets. To add to this, the expense ratios are much lower for index funds ~1-1.5% and keep going down further as their AUMs increase. The composition of the target index is a known quantity; so the running costs are less for an index fund as no stock pickers or equity analysts are required.

One obvious disadvantage of index funds, however, is that they cannot outperform the broad markets unlike actively managed funds. However, for long-term investors who want to avail consistent gains and take advantage of the growth story in India without constantly churning their mutual funds portfolio, there is nothing better than an index fund. When it comes to building a corpus for milestones such as retirement, index funds are clearly a superior choice.

Index funds are offered by a majority of mutual fund houses like ICICI Prudential, Birla Sun Life, Franklin Templeton, HDFC, UTI, etc. All these are mutual funds and can be bought through mutual fund distributors. The Nifty BeES by Benchmark, though, is an exchange traded fund (ETF) listed on the NSE. To buy an ETF, an investor need to have a demat account and an equity broking account.

Unlike actively managed equity mutual funds, Index funds offered by different mutual fund houses do not vary in their returns significantly (see table: Index picks). Hence, the parameters to choose an index fund are different from those used for an actively managed fund. Expense ratio and tracking error are the most important factors while choosing an index fund. Expense ratio indicates the cost of investing in the fund and the tracking error indicates how much the returns of the index fund differs from its underlying index. Low tracking error and low expense ratio are desirable. Typically, higher AUM results in lower expense ratio. It also keeps an index fund stable and not prone to large withdrawals by major investors.

Golden words from "The Intelligent Investor"by Ben Graham, which I would like to share: " In our own stock-market experience and observation extending over 50 years, we have not known a single person, who has consistently or lastingly made money by thus "following the market". We do not hesitate to declare that this approach is as fallacious as it is popular." - Source: "The Intelligent Investor" by Benjamin Graham (2003 edition), page 3.

Introduction

Stockmarket has been of interest to me for a long time, have found time and money in the past two years to experiment with the same . It also took me quiet a bit of time for me to identify the kind of investor I am.

As any beginner would start, the idea was see if one can quickly multiply your investment from stock market but realisation came that the game is for the most seasoned investor who could spend a considerable amount of time to the task and it was very difficult to believe that I will be a better informed investor ahead of the mass.

Tried to understand trading based on technical analysis studied Candle stick, Elliot wave , Moving averages etc., Back testing proved that even if successful, after the cost, the returns don’t justify the risk.

Realised that the road ahead will be value investing. Having had very little exposure to finance, balance sheet, P&L, cash flow and ratios had to spend a lot of time to understand the basic. Even there I will never be a master. Needed a simpler tool that can guide to a value opportunity. Continued my search till I landed on a model based on Buffet teaching. The difficulty was to get the 7 years data input for the model. Continued my search for a source till I found one.

http://www.traderji.com/fundamental-analysis/12555-tool-fundamental-analysis.html

I believe the model can guide to a value opportunity, but whether will it give satisfactory results? Only time will tell, because the biggest challenge in Value investing is Patience!