Many people buy stocks when the markets are high and abandon them when they wobble.
Amit Dhingra* falls in that category. He has been investing in stocks on-and-off since January 2000. But the years of experience didn't teach Dhingra certain truisms — to stay calm, have a long-term plan and buying stocks at the right time. As a result, the markets made him bleed money.
Unsurprisingly, Dhingra — like many others — has become a stock market agnostic. You wouldn’t blame him, would you? The answer to this depends on his investment strategy: Did he enter the markets at the right time? Did he buy overvalued stocks? Did he panic too soon? Did he have an appetite to suffer losses for some time? Did he ever think long-term?
So, let’s look at Dhingra’s investment history to understand what really went wrong.
January 2, 2000 - June 2, 2001: A fresh-faced 22-year-old Dhingra invested in the 30-company Sensex index fund for the first time as a part of his New Year resolution. He was determined to invest Rs 3,000 every month in stocks, especially because newspaper reports told him everyday about how the equity markets were doing so particularly well.
Unfortunately, the enthusiasm in the stock market soon fizzled out. Dhingra kept at it for a year before he decided to stop investing in stocks. Since the Sensex tumbled around 50% during that time, his total investment of Rs 54,000 saw him lose roughly Rs 20,000!
December 27, 2007 - March 1, 2009: Dhingra may have been chastened from his previous experience, but was determined to make his investment count this time. He was older and wiser and more experienced. He knew he made a big mistake last time: shortly after he had exited the Sensex fund, it had risen by an eye-popping 600%.
The market was at an all-time high and Dhingra was keen to join the party. He decided to put seven grand in the Sensex index fund every month.
But the markets failed to stick to Dhingra’s script. Over the next 15 months, the Sensex came crashing down (by 62%) — and so did the optimism.
In total, Dhingra invested Rs 1.05 lakh in the Sensex fund. But in return, he got back just a little over Rs 63,000.
You see, you really can’t blame Dhingra for swearing off equity markets. If you add up both his stock market stints, his total investment was Rs 1.59 lakh, but all he got in return was around Rs 98,000 — a loss of about Rs 61,000!
But if he had braved the onslaught and stayed put in the markets for a few more months, his investment would have given him decent returns. To give you context, the Sensex fund actually rose 162% between March 2009 and November 2010!
He made similar forays later too, but you get the drift, he never survived a market downturn.
But hindsight is always 20-20, isn’t it? That’s true, but only partly. In fact, there are great lessons to learn from Dhingra’s journey.
Think long-term: This is especially crucial while investing in stocks. People like Dhingra may accuse stocks of being wildly unpredictable. Again, that’s just partly true. Sure, stocks are unpredictable over a brief period of time. In the long run though, historical data suggests that stocks have generated better returns when compared to gold, fixed deposits (FDs) and even real estate.
To give you a perspective, Sensex was at 100 in 1979. Fast-forward to October 2018, it is above 34,800 points. In fact, just a few months back, the Sensex was hovering above 38,000. Imagine if someone had invested Rs 10,000 back in 1979, its value would have been around Rs 34.8 lakh today!
Basically, the golden rule in stock investing is to have to a long-term strategy. The longer you stay invested, the better the chances are of you earning healthy returns. That’s because stock investing over a longer period usually helps bringing down the risk factor associated with stocks.
Time the market: Dhingra is a victim of terrible market timing. He always made stock market purchases when the Sensex index was already at a high.
Although timing the market is fraught with risks, it is always better to make stock purchases when the markets are not trading at their peak levels. That’s because it leaves little room for more growth. More often than not, you’d find the market correcting (stock price decline) once they their hit all-time highs.
Look for ‘value’ stocks: This is another common mistake people make. Dhingra was no exception. Since he believed in the market hype, he didn’t think twice before buying stocks that had already become very expensive. Also, the valuation of stocks usually go north when markets are doing well.
However, you need to careful before deploying such a tactic. That’s because richly-valued stocks may offer limited opportunities for your investment to grow. Similar to a peak market, expensively-valued stocks leave little scope for growth.
For instance, take a look at Hindustan Unilever Limited’s performance in the last few quarters — they’ve been nothing short of brilliant. As a result, the company’s stocks have become very expensive. Therefore, think twice before investing in their stocks. That’s because the company will have to pull off stunning results every time to help your investment grow. If they can’t sustain those levels, you are exposed to markets risks.
Related read: Our research report on Hindustan Unilever Limited
Have prior knowledge: One of the greatest investors of our times — Warren Buffet — once said: “Never invest in a business you cannot understand.” This is why you should do some research before you start investing. Don’t merely go by what people say or by the overall optimism flowing in the markets.
Learn the different ways of picking stocks (top-down and bottom-up approaches). These strategies will come in handy and ensure you don’t get swayed by pessimism and fear, like Dhingra did.
To sum up, investing in stocks are somewhat similar to Mahindra Singh Dhoni’s batting. Just like he soaks up the initial pressure before bringing out his ballast in the end overs to win India tight run chases, you may have to swim against the current for some time before reaping dividends. In short, it’s always better to adopt Dhoni’s — not Dhingra’s — strategy while investing in stocks.
*Amit Dhingra is a fictitious character used for the purposes of this article only.
0 people liked this article.