Evolution of my Stock Investing Strategy

Posted on September 14, 2010 by Sumant Kant Sahai — 5 Comments ↓

When I started investing, the first thing that struck me was the ease with which you could operate the Demat account. Investors who have been around when you invested only in the Physical Format of the shares would relate to this.

The other revolution is in the amount of data available for analysis. I was reading the Company History, the Annual Report and the Charts in the companies I would be interested in. Getting to know the company gave me some confidence to invest in the company.

I was soon to evolve a very simple strategy for stock selection; viz.
Step I: Study the Company History & about the Quality of Management, and
Step II: Identify the Shares that have fallen the most since the market had gone into a free fall

Elementary! Bull..! Hogwash! You could say that. But, it indeed worked. The shares that were falling the most were those in which FII holding was the highest. Also, there was no fundamental reason for such a huge correction in India. It was just a free fall driven by withdrawals by FIIs. Experts were crying themselves hoarse that there is nothing wrong with the Indian economy.

I guess, I was just thinking very simple; what goes up, comes down; and vice versa. Anyway, the Strategy evolved quite by serendipity. And like most things beautiful, soon outlived its utility. It was not based on any enduring truth. Soon the markets had found the bottom, and then the same analysis was not yielding any fresh ideas. Just wait; this one is for keeps. We must keep evolving the strategies, but not get wedded to them. We should apply them as and when they are applicable, and move on to the next. It does mean we have to continuously devise new strategies to match the new situations.

Purists may say that it is not strategy; it is only a tactic or an idea. You may choose the word you like. I am OK with it.

Flashback; again to my story. It was just plain logic that told me to stagger my investments. It was much later that I was to learn words like SIP, STP & Rupee Cost Averaging. They are good concepts & you should make them a part of yourself. Try to live (invest!) according to the diktat of the concept of Rupee Cost Averaging. If you feel like rushing into a buy/sell, cry, “Patience!”

Somewhere along the line, I started doing the Futures. I have never been a speculator and I detest gambling, which please note. I was doing it only to understand the instrument and only to understand how the Nifty works, I convinced myself. I would make a few hundred Rupees, lose a few. Till one day, when I was left holding two Nifty’s. That was when the Election results came out & the Index zoomed. I lost big. But, was it not miniscule compared to what I had made? I just tried to explain it to myself.

Again, this is an important lesson. Playing with Margin Instruments; viz. Futures, Options, etc. is not for amateurs. They are meant for professionals whose lives depend on the Stock Market. Ditto, for Commodities Market. Do not dabble in markets or in margin instruments which you do not understand enough.

I have met persons who get carried away thinking that they can make a few hundred or a few thousand everyday (Like buying & selling the Shares the same day!!). Normally, it does not take very long for them to realise that it is not so easy. No problem in that. Except that, such an experience puts them off the Stock Market. Now, that is not a good outcome.

I am a firm believer that an Investor whose Primary Source of Income is NOT the Stock Market, must only look for Medium or Long Term Stock Ideas.

Let me admit here, that I do know of individuals who are purely Short Term. Apparently, they are making money, though I am not sure. They are very nimble and react fast, and are constantly working on Tips. They may be very young & may have spent considerable time in the Market already. However, I firmly believe that for every one person making money in this manner, there will be more than one person who is losing money. It will be a very miniscule minority having that knack to make money with this Strategy.

Flashback; again to my story. I was running out of ideas, but luckily for me I had started doing some reading. I was learning that before Investing one should do ‘Fundamental’ research. I was soon to progress into studying the Balance Sheet & the P&L accounts. I started foraging data for Analysis & it soon took me to a lot of Sources of Information; viz. ET, Rediff money, Moneycontrol, etc. Thereafter, it was easy to progress to studying the Profitability Ratios, from there to Leverage Ratios, and further on to Valuation. The Knowledge of Financial Terms slowly started converting into pearls of wisdom. But, of course, it is an ongoing journey. Somewhere along, I realised the wealth of information available on the web-sites of companies. I also realised the importance of learning about the management team.

Finally, it seemed I was zeroing on to an enduring Strategy. The world of Stock Investing look much more orderly once you get on with Fundamental Analysis of Stocks. I seem to be headed in the right direction. While, the search for that great (Short Term) Strategy/Tactics/Idea that I could apply in some niche at some opportune time continues!!!

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