Buy low and sell high ? this is one of the most well-known fundamentals of investment process. But how many of us follow it? In a majority of cases, what you find an investor doing is just the opposite ? buying high and selling low.
Investing is not just about money, but essentially it?s a behaviour. How you react or not react to a situation determines the quantum of your wealth. Last week, S&P downgraded India?s rating to negative and the immediate aftermath was that the Sensex slipped and, then, recovered during the day.
The initial reaction was overdone as was the case when India was everybody?s favourite destination. For investors, this is an extreme behaviour and one needs to be cautious if he wants to create wealth in the long run.
The first thing one must remember is that everything has an expiry date. So, when you decide to buy a stock, you must set a date to sell it. It?s when you sell that you get profit or pare your loss. You come across analyst typically recommending when to buy a stock, but very few tell you when to sell. There are a few basic rules, which, when followed, would ensure that you have more gains in your portfolio.
Keep a record of your investments. Record your investment transactions, purchases and your behaviour pattern, which influenced your action. Having a purchase/sale/review checklist will ensure that every transaction has a rationale and this is how you can build your portfolio in a methodical manner.
Stay clear from the crowd. If everyone known to you is buying a particular stock, more times than not, it?s time for you to sell. This is when the prices go crazy and any news having an adverse impact will cut your gains. Book your profits and sit tight on the gains.
Set a target to sell and review the target. When you buy a stock, set the target on expected returns and holding period. Once you achieve your stated returns, review the stocks for any possible upside in case you are long. If you are sure of the upside, then revise your return target or else walk away with your gains.
Reaction to news. With the media tracking every single move by companies today, the reaction of the markets to news is, many a times, kneejerk. Beware of reacting to such news. If you are a long-term investor, check if the news is a temporary setback or has a long-term fallout. If it?s temporary, it?s time to accumulate more. Otherwise, review the holdings and act accordingly. Remember to record these mental notes in your review checklist.
The noted rules are elementary and will typically work in all circumstances. But the question arises, what to do when the crash happens? When the market crashes, the good, bad and the ugly are all given the same treatment as all lose value. In the case of a good stock, it?s a temporary ?book loss?, as it would ideally recover from the beating, on account of its strong fundamentals. And it?s time to accumulate more. For the rest, get out at the earliest.
Your behaviour is the key. As you will notice, your behaviour is a major ingredient in ensuring your investment success. How you handle the highs and the lows ? with patience or following the herd ? will go a long way in determining your wealth. Buy low and sell high can be a reality if you are able to control your emotions and small steps such as recording them, in real time, as and when you encounter and, then, at a later date, referencing them, would be an asset for you in your wealth creation journey.
Investing is a journey, not a destination. Buy-set target-book your profit. Repeat the processes and, more times than not, you will be glad with the result.
The writer is founder & managing partner of Zeus WealthWays LLP
