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Saturday, November 27, 2010

Should I buy now?


I have received a query from JS (white labeled name to protect the identity). He has asked me if this is a good time to invest in equity. JS, a Chartered Accountant by qualification, is a leading professional in the field of finance.

Since this answer could be of common interest, I thought to post it on the blog.

My take is below:

JS bhai,

Yes, I am anyway cold when it comes to commenting on stocks/equity market. You know that I do not change my views often so do not write frequently... :-)

If you are a long term investor then I would advise you to buy on every dip. This is a common message that we often here from 'experts' but how much and when is something that still puzzles us? So to answer this, I have a simple formula and that might be worth following:

Investment Drop in sensex
10% 10%
20% 20%
30% 30%
50% 40%
70% 50%
90% 60%
100% 70%

The above table will help you to spread your investment. If you had used it in the previous downfall, then you would find it equally effective. e.g. in 2008, you could have accumulated 46% of stocks between the sensex level of 12600-8400 (bottom). The fact is that these levels offered the best value. However, if you have some other method to follow then you can use that as well. But have a disciplined approach in whatever you do. The success rate will be high.

Now in the present case the sensex touched a high of 21000 couple of days ago. So if it goes to 18900 levels or below, which is a drop of 10%, you may invest 10% of total available funds for stocks. If it goes further down then you follow the table given above. If the Sensex goes up then also there is no problem because you have accumulated something to cheer about.

Now let me clarify/add few more points to above:
- Invest in the stocks that you feel are quality stocks (I have given a presentation earlier on this topic, you may use the same to identify the stocks)
- Invest in the stocks which are from long term, low debt, good growth, quality management and are offered at attractive valuations etc.
- Some people have doubts that if a stock is undervalued then it is a good at all levels then why not to buy when the stock was trading at 21000? My take is that yes you can buy at any levels and do not wait for market to crash. But when the market was trading at 21000 level, there were very few (hardly any) which were available at discount. Now as you have dips you start taking exposure in those stocks which you feel are good, offering value and qualify on our parameters.

Warren Buffet has rightly said that invest when everyone is selling. With the above approach our investment approach will be spread over various intervals and it will ensure that we have money to invest when everyone has literally run away. :-)

Trust this is of help.

Niteen S Dharmawat

On 11/26/10 1:15 AM, JS wrote:
It seems that your presence has got cold and snow in UK.

Should I enter in stocks now or wait?



Unknown said...

I agree with Niteen :)

Raj Jagtap said...

One negative of following this strategy is that we will miss on the long bull runs like that happened between 2003-2008 where the market went from 5000 to 21000.

I think we should invest systematically under all conditions. Lets consider a person has 10K to invest every month. When the market is moving up (its at alltime high), he can invest 5K and keep 5K in liquid fund. Thus he will have subtantial cash available with him also he has gained from the bull run.

Now, when the market corrects he can use the strategy specified by you.


Niteen S Dharmawat said...

Yes Raj, this can be another excellent strategy to invest and spread investment. In fact it was discussed in one of the last papers of Benjamin Graham and he said that if someone can follow this strategy with discipline then returns are guaranteed.