By: Gaurav Mashruwala
When do we like to purchase any goods or services - when their prices are
high or when they are low? Are discounts good for us or are they bad? While
all of us run when we hear word discount and sale, our actions are exactly
opposite when it comes to equity investing.
Legendary investor Benjamin Graham in his book "The Intelligent Investor"
has stated that stocks become more risky when prices are high and less risky
when prices are low. This we know is also true for all our purchases. Goods
and services are less attractive when prices are high and more attractive
when prices are low. However while investing in equity markets we sell our
stocks when prices are falling (low) and when they are rising we feel safe
to invest.
Investing is a strange business. It's the only one we know of where the more
expensive the products get, the more customers want to buy them - Anthony M
Gallea
In year 2002 when equity markets were at its bottom after technology bubble
had busted, one of my new client was shocked when I recommend 25% of his
allocation into equity. According to him equity market was speculation den.
Same client about six months ago called me up to check if it was alright to
park his entire PPF maturity proceeds into equity.
Another interesting observation made by Benjamin Graham is that an
individual considers someone a speculator if that person was to invest in
equity markets after they have fallen massively – say may be after a bubble
burst. Same individual will treat someone as an investor when that person
invests into equity markets after they have risen sharply. What is more
speculative in nature - to invest at low levels or high levels?
Since it is difficult to see future, we take shelter in past to predict
future. It is like driving the car by only looking into rear view mirror.
Rear view mirror only reflects the road, which has already been traveled.
The reason we consider an investor speculator when he invest after markets
have fallen is because we are referring our judgment on past events. The
same is true when we refer to someone as an investor after markets have
risen. However we all know that "past performance may or may not be
repeated" – To drive ahead we need to look in front and not in rear view
mirror.
It is common sense that to earn good returns we need to buy low and sell
high. This also means sailing against the tide. Buy when everyone is selling
and sell when everyone is buying. This strategy is called contrarian
strategy.
It takes patience, discipline and courage to follow the contrarian route to
investment success: to buy when others are despondently selling, to sell
when others are avidly buying - Sir John Templeton
The reason Sir John Templeton says it requires courage to be contrarian is
because as human beings we prefer being with the crowd. We are not
comfortable being seen opposite the crowd. When we are on opposite side of
the crowd whole world can see us. We feel that if we make mistake then crowd
will laugh at us. On the other hand if we are with the crowd and even if our
strategy goes wrong nobody will laugh as everybody would have gone wrong.
Finally ending with one more quote from Benjamin Graham "Individuals who
cannot master their emotions are ill-suited to profit from the investment
process".
Source: Moneycontrol.com
No virus found in this outgoing message.
Checked by AVG Free Edition.
Version: 7.5.503 / Virus Database: 269.15.14/1100 - Release Date: 10/30/2007
6:26 PM
No comments:
Post a Comment