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Monday 10 January 2011

Markets Correcting: Should I buy or Sell?

ttA frantic phone call on my mobile today from a friend from Pune, India today got me thinking. The Sensex has corrected by nearly 1350 points in the last 5 trading sessions. The market participants are appearing on TV and pronouncing gloom and doom. Interestingly, these same people saw nothing wrong with the market a week back!
So, here is the gist of what I had to say to my friend today.
  1. I have no idea if the market will go down further from here.
  2. I have no idea if the market will go up from here.
  3. Think from a overall business ownership perspective and not a stock ownership perspective. The last time I checked Ratan Tata had not sold his stake in Tata Motors or Tata Steel when the prices had collapsed in 2008, neither did Mukesh Ambani or Sunil Mittal. So, why should you start thinking of selling with every 1000-2000 point decline in an imaginary index?
  4. If you are holding good businesses in your portfolio, then keep holding them. 
  5. Use this decline to add to your holdings. Sure, the prices may go down 10% from here, but it may also go up 20%. I know of people who sold stocks around 18000 (Sensex) thinking that the market was getting overvalued. Unfortunately, for them, the index is still not back to that level. It may get there or it may not. Stop playing this game of prediction. It is a game no one can win.
  6. When you invest you need to have a strategy. One which identifies when to buy, what to buy, when to sell and how much of cash to keep in your portfolio. If you have a proper strategy that answers all these questions, then just follow it. Please keep some cash aside to use for better opportunities that may come in the near future.
It has been best said by Warren Buffet, "The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values."

Happy Investing.

1 comment:

  1. More questions on point 6 and the strategy part:

    1. When to buy- Isn't the answer elementary- buy when the market is going down? Is there a way to understand the cues of the market on "how much more" will it go down? I know there is no science, but something like a calculated risk?

    2. What to buy- As an investor, how do you decide how your port-folio should look like? Anything you have written/blogged about in the past?

    3. When to sell- I think this is the biggest of all questions! When is the right time? Any rule of thumb you follow for your personal portfolio, or is it just a hunch?