As the investment climate turns more pessimistic by the day – more and more people are turning away from the stock market – and I’m being asked by friends why I continue to remain bullish when there is so much bad news coming in from all directions.
The answer to that is I’m not bullish in the sense that the market will go up next month or next year or in any other ways that people generally think about being bullish. Yes, I’ve bought stocks in the last few months, and will continue to do so in the coming months, but the reason for that is not because I’m bullish in the sense that most people think about it.
I have no idea where the market will be next month or next year or two years down the line, but I do believe that companies will continue to exist and make profits many many years down the line, and as long as I invest in companies that don’t go bankrupt and with money that I won’t need in a hurry I think I will come out fine.
I recently re-read some parts of The Intelligent Investor, which is of course considered the bible of value investing, and I think two excerpts from the book capture how I feel quite nicely.
Here is the first one:
A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
Except for the first one or two years of investing when I was still in college – I’ve viewed stocks as representatives of companies and that makes it a lot easier to go through all the volatility that exists in the market today, and has always existed.
I think this mindset improves the chances of investing success phenomenally but I have no illusions of never making any mistakes, and I’m pretty sure there will be some mistakes and that’s really not in my control. I can’t be error free but I can diversify in a way such that those errors are not very costly.
Jason Zweig has added commentary to the issue of The Intelligent Investor I currently have, and I think this excerpt captures the essence of what I want to say about errors quite nicely.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong. Many â€œinvestorsâ€ put essentially all of their money into dot-com stocks in 1999; an online surveyÂ of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Grahamâ€™s call for a margin of safety, these people took the wrong side of Pascalâ€™s wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong
In my opinion – I can be wrong about two things – first about investing in stocks itself – five years down the line I could find that companies aren’t making profits any longer or less than they were five years ago and the macro situation was so bad that stock prices are just a third of what they were a few years ago. And to get away from this risk one could invest in debt instruments, real estate, gold or just keep cash – basically not invest 100% in stocks.
The second risk is stock specific risk and to get away from that you can invest in multiple stocks and especially stocks that have been around for decades, have low debt, high dividends and good fundamentals. This will at least minimize the chances of bankruptcy and if you have ten stocks in different sectors or large cap diversified mutual funds then you are protected from stock specific risk quite easily.
I’m not a market trader and I don’t pretend to understand everything that’s happening in Europe or how it will play out in the future – but I do know what has worked for me in the past and I have high confidence that companies that have been around for decades will continue to exist in the future as well and make profits. At this point, this is enough to make me interested in stocks, and be bullish as they say.
58 thoughts on “Why I continue to invest in stocks?”
i m fresher investor in stock i hav to start with 20k,pls anyone suggest me how to start and were.
I feel the days of invest in Blue Chips and forget are over looking at the severe beating some of the Blue Chip stocks like L&T,SBI,BHEL,RIL have received.
I would rather set a target say plus or minus 10% and buy or sell the stocks however Blue it is.
For this to happen,constant review of your stocks is required. If you cannot do it dont think of alternative like Mutual funds.Mutual funds are worse than direct investments.So the solution is sell whatever you have .
Same rules apply to all types of investments whether stocks or mutual funds.You can not sit tight on any type of investment. Regular tracking and review of your portfolio is a must as investing is a dynamic process. Investing is not for lazy people.
Of All the gyan that is getting batofied here. I think i like your comment. ‘Investing is not for lazy people.’ Lazy in the sense, probably meaning intellectually lazy people. People who are looking for a formula based one time activity and success. It’s a constant learning process and one has to prepare for it. Gain & Loss is part of the game just like any other sport. When someone like Warren Buffet says he has been reading the AR of IBM for 50 years even though he didn’t own the share and only recently bought a major stake at a life time high prices of IBM, we the mere mortals have to just sit back, listen, learn and deliberate and move ahead.
Very true, Raja.
Invest in equity for double digit returns, buy real estate as real estate price never goes down, invest in mutual funds if you have no time to track the market etc are some of the gyan imparted to us like get good grades in school, get a job and life is settled . We need to filter out facts from opinions. Did a post on similar lines Fact or opinion:Do Due Diligence
What is the first thing we do if we have to play the game say cricket or chess? We have to learn the rules. The only thing that is constant in life is change so things also change and we need to learn or be left behind. Fey years back there was no 20-20 and rules of test cricket does not apply to 20-20 format. Bottom line is we have to learn the rules, apply them, make mistakes, learn from them. And if we change our game say want to play basketball it’s back to square one.
Secondly taking analogy from cricket every player has a different style, Rahul, Sachin, Dhoni, Yuvraj, Sehwag..each has it’s own style, limitations, strength and weakness. Similarly each of the investor has his own style, his own risk preference, his own formula which works and what works for you might not work for me. So to each his own. And we all are trying to learn. Your logic makes sense in a way and maybe it would work..and if does please let us know.
With all the ban on Gita etc doing rounds would like to quote from it “Karm kar phal ki icha na kar”..(do the job and leave the rest)
Thanks for sharing the link of your post. I found it very useful.
Thanks a lot Anil and Manshu. We must remember there are no shortcuts in life
You are right about the procedure which was used in our analysis. We did calculate discounts at which blue chips are trading (compared to their 2011 & 2008 highs). Since an index like Nifty is made up of stocks which have been carefully selected by experts, it is our opinion that Nifty stocks are a safe bet for retail investors. An average investor would benefit more if he has a higher chance to protect his capital as well as increase his returns. And chances of capital loss are lesser when investing in blue chips rather than potential-multibagger stocks of mid & small cap universe.
In our post itself, we had mentioned that – During crisis, it is advisable to look for sustainability of business rather than growth prospects. There is no point buying a cheap growth stock when it may not even exist after the crisis is over. And barring a few stocks like RCom, it can be safe to assume that stocks like RIL, BHEL, SAIL are here to stay and as per our common sense, would survive the crisis. And if these stocks canâ€™t survive the crisis, there wonâ€™t be many stocks which could.
Itâ€™s common knowledge that stocks give better returns over the long run when compared to other asset classes. Therefore it makes sense for retail investors to buy Blue Chips now or else they may again miss the bus (like one of March 2009). This does not mean that there may not be any further fall in blue chips. But that is the risk which comes with equity markets.
As far as harshness of comments is concerned, it is always optional on oneâ€™s part to use harsh or soft words. We respect your response as it would help clear any misunderstandings which your readers might be having.
One should continue investing in stocks even if the markets are heading down. Reason being that sooner or later, markets will turn around and head northwards. Only thing which an average investor should take care is that investments should be made in stable companies which would be able to weather the crisis like the present ones. An easy way to shortlist such companies is to look at the composition of Large cap index like Nifty 50.
We did an analysis and found that there are a large number of well known stocks which may be available at bargain prices. Some of these stocks are down more than 60%!
You can access the list at http://www.stableinvestor.com/2011/11/large-cap-nifty-stocks-available-at.html
I looked at the stocks in your list and what you have done is taken the 2008 highs and today’s price, and seen what stock has dropped most, and arranged that in descending order.
I’m afraid I don’t know of a more inaccurate way of finding value, and this kind of list is completely useless. Value is based on earnings of a company and their future prospects, not by how much the price trails to its once highs.
I’m normally not this harsh in comments, but a large number of people read this, and I don’t want them to look at that list and make a bad decision.
How come some of the comments which appear in my Email are not reproduced here? Suppose I want to reply to the comments that appear on my E Mail,how do I do that?
That’s not possible as far as I know – as soon as a comment is published – an email is sent out and the only way the comment you see in the email doesn’t appear here is if the comment is deleted.
I’ve never done that, so I think what’s happened is that you are subscribed to multiple comment threads and you are looking for a comment in the wrong post.
If you forward me the email – I can take a look at it and figure out what happened.
The only way to respond to comments is to visit the site by clicking the link in the email and then leaving a comment like you just did. If you reply to the email, then it’s only visible to me, and sometimes even I miss it so that defeats the purpose totally.
Thanks for sharing insights and points from Intelligent Investor. Those are definitely relevant and useful today when we look at the current market.
The quotation “…The intelligent investor is a realist who sells to optimists and buys from pessimists.” is pretty interesting to note, but buying @ pessimism and selling @ optimism is easier said than done. Its almost like saying “Buy Low, Sell High”. But it shows us a less that one has to be prepared to buy good stocks or businesses during the bad times, which I agree.
However, your initial point on buying businesses that will make profits, survive in different cycles and not go bankrupt, seems a better approach to me.
Also your frank admission that predicting what will happen next month/qtr/year is difficult is true. No one can outsmart the market however experienced one is, but if you invested in a good business you will get stable returns barring the few hiccups that we see during economic slowdowns. Its quite difficult to predict events in Europe or country specific issues but one can definitely take a bet on certain sectors or companies to see if it will survive of the next decade or two. Companies with leadership in various sectors, having good brands, strong business models and cash flows should do well in the foreseeable future.
I’ve said that several times – the easier said than done thing, and I’ve said that especially when times are good and people say well sure a FD pays 8% but I can make a lot more in the stock market – well maybe you can, but most probably you won’t because it’s easier said than done 🙂
Jason Zweig is a awesome guy – he really made “Intelligent Investor” an interesting read. These days I am reading Jason Zweig’s “Your money your brain” – on behavior finance & neureconomics. Superb book to realise once mistakes.
I sometime wish some one could rewrite these classics with Indian examples and context where ever possible at least.
What should I say – “tumne mere muhn ki baat cheen li”.
But I think after reading so many books – I know something about US markets. 😉
Very true Hemant. I too have been reading like crazy in last 2+ years and each time i think about this wish. You came across any good books for our markets ?
Read “Value Investing & Behavior Finance” by Parag Parikh
Folks – Almost all of what is written in “The Intelligent Investor” is US based remember that markets are exactly one and the same across the world – because:
A) Markets are never efficient in that most stock are never correctly priced and
B) MORE Importantly, markets are primarily driven by Human Greed – which will never change across generations and countries and ethnicities and religions.
So if you have read some US classics consider yourself eligible to apply those principles in ANY stock market in the world.
I’ve never felt that 🙂 I think the high level concepts are all the same and can easily be used across countries.
I haven’t heard of this book – but now that you mention it – I will put it on my reading list.
Checked out the boo at amazon Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich on Amazon.com (clicked at:Click to Look Inside) found it very interesting. He shows why we often misunderstand risk and why we tend to be overconfident about our investment decisions. Waiting for Manshu or you to share your thoughts on book 🙂
Checked out the book at amazon Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich on Amazon.com (clicked at:Click to Look Inside) found it very interesting. He shows why we often misunderstand risk and why we tend to be overconfident about our investment decisions. Waiting for Manshu or you to share your thoughts on book 🙂
This is a good read for people who have read intelligent investor, a random walk down wall street or “asset allocation” by Roger Gibson and accept that they are not smart. Even they will have headache & may feel guilt after reading this.
Other will either throw this in dustbin or vomit or in worst case suicide 🙁
if you won”t gamble with stock, it is the best investment. your thoughts are v clear,it is always long term investment. buy it whenever you have money for it and sale it only if you are holding stocks of the company and sale it stage wise if profit/earning is v good .
i have started investing in stock since sensex was 3500/4000 and seen ups and down but every
height of sensex has became bottom of tomorrow, so 21000 will be bottom of tomorrow but when this “tomorrow” will come no body knows it. further market is not only earning place,
bonus,right shares, dividend yield are important factors not considered by most of the investors.
keep it up.
I’m really glad to see your wise comment and it’s amazing to meet so many people who are buying stocks today and have done it over the long term through this blog. We’re the minority but it’s good to see that this blog is attracting the kind of people who are at the same wavelength.
I am a long term investor(6 to 10Years) in shares of well established companies like TCS,L&T,ONGC etc).They have given me very good returns because I have perodically booked profits and even made total exits from some.
However during the last one year I purchased good stocks when they were quoting at their 52 week lowest thinking they may not sink lower.I have been proved wrong and right now sitting on a loss of 5%
Of course I dont intend to sell or exit and will sit out.I personally feel the time right now is not very conducive to make any furthur investments in shares.
whatever shares you had sold in the past and now available at lower price than your s.p.
and margin is reasonably good, you must re-buy it,for the reasons
you have already equired knowledge of it,i.e company,trend,balance sheet etc
you have already earned profit out of it
it safe to buy at lower price after sale,rather than buy first and than sale, on expectation
of higher price.
also consider bonus expectation for re-buy you old shares.
money kept for time gap is one of the benefit.
Why what makes you think that now is not a good time to invest?
When the market (Sensex/Nifty) is down more than 19% in the last one year and you are sitting on a loss of 5%(only if I may add.)L&T itself has given a return of -43% in last year, -34% in two years. It makes me request you to share your tips especially w.r.t to periodically booking profits and exiting. For most of long-term investors usually miss out on booking profits.
The market is not doing well because of US, Europe crisis and internal factors such as inflation, govt. policy, my feeling is that we have not bottomed out yet..we might see more bottoms in time to come. This is the time to learn and apply our knowledge for what went up came down but then what went down will come up..too!
Very good advice. I used this logic during the 2008-09 downturn and was amply rewarded in ’09/’10.
You’ve been doing some excellent posts analyzing/comparing ETFs, mutual funds etc. What about the top 25 (or more! :-)) companies that you think has strong fundamentals and good future stability/prospects and yet their stocks seem to be way below what it should be. I believe good metal (eg Tata Steel), auto (eg Tata Motors, Maruti) company stocks are very likely to go up by the time the downturn eases. Analysis of other sectors and the forerunner companies in those (and the ensuing discussion) would be useful to most of your readers, especially in a bearish period like this. Mind you, I’m not suggesting that you us give tips (that you insist on avoiding anyway), but merely an analysis of companies with strong fundamentals :-)). Apologies for not putting this in the Suggest a Topic section, but this was more a comment that emanated from your excellent post.
I’ve tried to do this in the past and found that it’s just a massive exercise and I don’t really have enough resources to do something like this. I see good business magazines coming up with fairly good lists and I guess they have an army of people and access to databases that helps them filter out the companies because when I tried to do something like this I was stumped by how stupendous this exercise would be (at least the way I envisioned it).
The posts on dividend yields and list of buyback shares is a step in that direction, and the next thing I have in mind is debt free large companies, so maybe over a period of time I will have such a list here on OM but to do it in one shot is more than I can chew 🙂
As always a great article. Would you mind just disclosing your stock holdings, the ones that you are buying now, which may help investors like me..just a thought.
Hi Ravi – I’ve given that a lot of thought and for the time being decided against it. There are a lot of factors for that….but primarily I haven’t done enough to prove to myself that I haven’t just got lucky in the past and given that I do make a fair amount of mistakes – I don’t want others getting influenced by my picks and losing money.
Maybe in a few years….not now.
What about what you look in the stock before buying?
Great products – that’s the one thing for sure – I guess I could do a full post on that – I don’t know how useful it will be but will be fairly easy for me to write 🙂
Very honest post I must say. Thanks for sharing your reasons for investing in stocks.
If we compare investment to be a journey then a traveler has many investment vehicles – stocks, mutual funds, gold, real estate, debt, post office as his options. Choice of an investment vehicle depends on the personal choice of the traveler. You have chosen stocks as your investment vehicle and you know you are getting into it. You are aware of the risks and rewards of your choice and you are going into it with your eyes open, not gambling, not trading or buying on tips. Your investment philosophy seems to be influenced by Warren Buffet – the legendary investor. Some of his quotes are
Never invest in a business you cannot understand.,
If a business does well, the stock eventually follows.
For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer. None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling.
The part I liked most is that you are open to making mistakes. Warren Buffett is widely regarded as one of the most successful investors of all time. Yet, as Buffett is willing to admit, even the best investors make mistakes. Buffett’s legendary annual letters to his Berkshire Hathaway shareholders tell the tales of his biggest investing mistakes.Warren Buffett’s Worst Mistakes from yahoo finance . Infact Oracle of Omaha admitted that the worst trade of his career was buying Berkshire Hathaway
Lesson I walked away from this post was: Quoting again Warren Buffet Risk comes from not knowing what you’re doing. One should not what one is doing and why!
Live and learn!
I completely agree with you, great post, What I would like to add is, economic cycle is turning for the worse, and as it plays out there will be lot of skeletons, it is very important to be have a deep understanding of valuations, and market cycles to venture into stock picking (self), I believe this market will have to YO-YO between ranges till the economic cycle bottoms out.
In the near term you would agree that beating 10% fd returns would be difficult and investors are flocking to fds., hence it is very important to carefully asses the quality of bank before investing in it, since this eco. cycle to take toll on weak banks.
LakshmiVilasBank is offering 10.5% (2yrs)on fds. but if you see the long term rating of LVB by care it is BBB.
How to evaluate quality of banks, for eg.
Bank A :
CAR : 20%
NET NPA: 0%
NIM : 3%
NETWORTH : 400 CR.
NIM : 4%
NET WORTH : 1200 CR.
kINDLY enlighten us on this very crucial topic.
Anek – this is a great suggestion and I wish I could do this type of analysis but I’m afraid I’m not knowledgeable enough to go into each bank’s balance sheet and then study it in detail and figure out where these skeletons may hide as you call them. In fact, for the most part – I stay away from all banking stocks as a whole.
I Did not mean BANKING STOCKS, I meant evaluating “BANKS” for placing FIXED DEPOSITS with reasonable amount of safety, you did an article on “bank fds with best returns” there are quiet a few banks offering 10.5 to 11% returns, like LVB, SARASWAT BANK, TAMILNADU BANK (10.25%) , but are they really safe,and how should we(ordinary investors like myself) evaluate banks, as to whether they are safe or not. I think you are extremely! knowledgeable on matters related to finance and economy, and I think you are doing a great job at helping ordinary investors like myself make decisions. it was just a suggestion, as to guide all your followers as to what red flags to look for while PLACING FIXED DEPOSIT IN BANKS. Thanks! anyway.
There is no need to evaluate banks for fixed deposits. If you want to be absolutely safe just stick to leading public sector banks even if it means slightly less interest rate.
I think every person should try every moment to learn about the things that matter to him/her, the world is very competitive, and I can tell you KNOWLEDGE IS EDGE, so no harm in learning from smart bloggers like MANSHU.
Oh okay – I am sorry I didn’t realize – I normally don’t associate risk with FDs because there have hardly been bank failures in India and up to Rs. 1 lakh is insured by the RBI.
I have not given it much thought because of this reason, but leverage ratios are what I’d like to look at if you were really thinking about risks to banks.
I have no idea of investing in stocks and hence no demat account. I am a strong believer of asset allocation. So I have invested in bank fixed deposits, post office deposits, gold funds and diversified equity mutual funds. Instead of buying stocks I have been making additional investments in mutual funds where my SIPs are running whenever there has been substantial correction in the market.
Your way is probably better and more recommended to most people wishing to invest in the stock market.
I agree. I wrote a detailed article on Asset allocation just a couple of days back – http://wp.me/p1Y418-24.
Manshu, Anil – Pls share your comments.
IMO, Asset allocation can influence determine long term returns.
Thanks for providing link of your blog.
I have gone through your article and found it very useful and informative.
I will surely post my comments.
Interesting analysis, if there were a way to see how adding a certain sum every year affects the portfolio that would have been good too. Given that a large part of the Nifty gains and falls have been in just one or two years.
I did add a hypothetical Rs. 1 Lac at the beginning of each year from 3-Jan-2000 to 1-Jan-11, a atotal of 11 contributions. While rebalancing has yielded better results vs investing in NIFTY alone the rebalancing results have lagged being stayed in MF 100% as seen below. But Behavioural economics will perhaps kick in when the market fell from 21000 levels to 8000 in 2008/2009 forcing several of them to exit. THe graph is relatively smooth for a rebalanced folio.
SUMMARIZED FINDINGS – Exhibit 2
Equity/Debt End of period value Rate of Return
Pure NIFTY INR 2,799,149.61 12.60%
90/10 INR 2,863,886.13 12.93%
80/20 INR 2,885,127.36 13.03%
70/30 INR 2,867,423.98 12.94%
60/40 INR 2,815,507.34 12.68%
50/50 INR 2,734,187.95 12.26%
40/60 INR 2,628,262.70 11.69%
30/70 INR 2,502,431.13 10.98%
25/75 INR 2,433,473.87 10.57%
SUMMARIZED FINDINGS – Exhibit 2
Equity/Debt End of period value Rate of Return
Pure NIFTY INR 5,937,927.44 23.31%
90/10 INR 5,627,987.19 22.55%
80/20 INR 5,260,420.64 21.59%
70/30 INR 4,854,125.33 20.45%
60/40 INR 600,459.37 17.70%
50/50 INR 550,331.09 16.77%
40/60 INR 493,513.70 15.62%
30/70 INR 432,789.03 14.25%
25/75 INR 401,786.45 13.48%
Pure Debt INR 251,817.01 8.76%
I didn’t realize that – sorry!
Thanks – that makes sense to add the money every year because people will earn within a time period and need to deploy that money.
Very Nice Post and i completely agree wit you.
Also, i think people who have other source of cash flow (salaried) should not be bothered about the current market condition and rather be happy if this continues for a longer period of time. That will make it possible for them to put in lot more of their money at good valuation. Rather they should be worried about the market doing a about turn and running away any time in near future as they’ll lose the opportunity to accumulate.
Yeah, that’s especially true for younger folks who don’t have a lot invested in the stock market anyway. By lot I mean compared with what they are going to earn in their salary. So for someone who has been earning for only a couple of years and investing that money in stocks – even if you lose all your money – you will probably earn it back in the next year or so.
If some one can mentally prepare to put in 300 (12 x 25) SIP’s in 25 years, being able to put in even 50+ SIP’s in a down market looks very appealing. isn’t it ? I think the mental model is important to have a long term view.
Also i feel, asset allocation is important , isn’t it ? For those who have been on SIP and keeping 50% in liquid assets this is a good opportunity, to put some part of that 50% to investment. As per you what is the right %tage of saving to put away in liquid instruments for such occasions ?
That’s a great thought and a great way of looking at it.
Re your question on allocation – a lot depends on how much volatility you can stomach and how well you think you know the investment. The % is 100% for me and I think about 25% for my wife even though any risk profile software will put us in the same bucket.