This Valentine’s day, It’s Time to Love Equities Again!

It's Valentine's day again. Last Valentine's day, I wrote about the most important stock picking parameter to love. This year, it's about loving the right investment strategy.

Valentine's day is all about love - it is time to love quality stocks, and reap long term benefits! 2016 so far has been nothing short of a nightmare for the long term investor. Most stock markets in the world are down more than 20% from their tops, and hence are officially in a bear market.

But a long term investor can’t ask for a better time. This is the opportunity to invest for the long haul. I am not a big believer in SIP, I will tell you why. Instead of INVESTING a fixed amount every month, I like to SAVE a fixed amount each month, and build a cash reserve to use when opportunities arise. Some may say timing the market is impossible. I agree. We, the retail investors will never be able to identify the tops and bottoms of the market. When professional investors can’t, how can we?

Well, we don’t have to wait for the bottom to invest. There are several data points that can help us identify “better” entry points. For example:

1. Stocks ignore good news like good corporate results, good employment numbers etc. and continue to go down.
2. Stock prices are significantly lower than their 52 week highs.
3. There is panic across the board with a seemingly endless stream of bad news – whether it is the weakening of the US Dollar, negative interest rates in EU and Japan, bursting of the bubble in China etc.
4. Retail participation increases in mutual fund.
5. Number of IPOs increase considerably.
6. Stock experts on TV talk about markets going to crazy levels.

Valentine's day - Love Thy Stocks

Remember, the stocks can still go down further, and stay there for a while. What we are looking for is a better entry point compared to the average valuation we would have got via SIP.

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Most retail investors do not realize it, but we have a couple of distinct advantages over professional investors.

1. Retail investors either start or increase their investments in mutual funds when the markets are at or near the highs. This is the time when there is a lot of noise in terms of markets hitting new highs. That is the time when retail investors feel left out, and start investing heavily via mutual funds. In India, retail investors started investing heavily about 18 months back. Retail participation peaked during Jan-March of 2015. This coincides with the market peak. When this happens, fund managers are forced to invest at higher valuations, thereby driving the price of equity even higher. Net result – the average purchasing price of the equity is very close to the market top.
2. Professional fund managers are measured by the performance of their funds during specific time periods. For example, 3-month, 6-month, 1-year, 3-year, 5-year windows etc. Hence they cannot afford to be in cash especially when the markets are going higher. They are forced to purchase equity, hoping for returns that beat the benchmark returns. Fund managers have to consider “business implications” in addition to the valuation at which they buy equity.

Retail investors do not have such constraints. If we save up enough when the markets are at a high, we should be able to invest in the same equity at a much better valuation.

Retail investors can invest in the same mutual funds that they would have started SIP in. This investment will be at a much lower NAV compared to the average NAV of the SIP.

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Retail investors can also invest directly into equities. This requires an active investment strategy and an active stock identification mechanism. I prefer bottoms up approach. I like to identify good companies that have a good track record, have low or no debt, and are run by great management. During the last two weeks, I did just that. I purchased a few TCS, L&T and HDFC Bank shares. All three are leaders in their space, have a great track record, and are run by great management. These stocks may still go down from here, but I believe they are a great addition to my long term portfolio.

Learn the art of building a solid stock portfolio – see how I am building my own portfolio based on Value Averaging.

You can read all about my ‘Value Averaging’ portfolio here.

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