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Is this blog for short term investors?

Prem Sagar has posted a review of my blog. His feedback is well appreciated and one thing he mentions which is interesting is that I have a shorter time frame of investing.

He’s right. While I deeply respect value investing and it has in the past generated enormous returns, I think a shorter term of 1 to 3 years is more appealing to Indian investors, largely because of a mindset issue. You can gauge mindset by asking: Where will I be after five years? You must know the answer to that in terms of:

  1. Which company you’ll be working for,
  2. What kind of work you will be doing
  3. Where you will be (location)

You then have a more long term mindset. Unfortunately a large percentage of people I know don’t believe they can give any answer to the above. People change jobs and locations so often they don’t know where they’ll be the next year. Careers change often. People can just about blurt out answers for a 1 year timeframe.

The other factor is the environment. We have not had a party rule our government for more than five years, anytime since 1996. State governments get overthrown, voted out or otherwise affected every few years. Our tax rules morph themselves every five years: Five years ago, Long term capital gains were taxed, dividends were not, tax rates were higher, stock options were considered taxable as bonuses and so on. Divident reinvestment was attractive tax-wise, and now it is not.

Thirdly, the rapid growth has changed the face of the nation. With rapid growth, certain things that were “hot” are now invisible, and certain other things have become “hot”. Mobile phones, just ten years ago, were exclusively for the rich. TVs were a hot industry in the 90s. When things change rapidly, it produces a short term vision because we’d like to “strike the iron when it’s hot”.

All these factors add up to provide short term views of 1 to 5 years. Some people have even shorter time frames.

At one time I thought I could change this mindset. But I have realised that I cannot. It is beyond one man’s control, plus, I think I am as guilty as the rest – even I personally like to book profits in a year or so.

And I have come to the conclusion that buying purely based on value or “fundamentals” is a “buy and pray” approach – meaning, you buy and pray that the price will appreciate. What we should be doing, as retail investors, is buying good stocks when the market STARTS to recognise them. Not earlier.

This means timing the market – and there are ways to time buying and selling stocks, which are very simple techniques that you and I can follow. Secondly it means discipline – selling stocks when they make you lose so much money (or fall so much from their peaks). Thirdly it means monitoring the market every week or so.

Given that, I would say my aim is not to pick the exact top or bottom of the market – but to time a buy or sell so that we ride the momentum, but don’t get stuck with a stock forever. I would typically expect to get a good return in a one year timeframe, and only choose opportunities where returns are trackable and visible. This is why I don’t do real estate, and I don’t like long lock in periods or exit loads.

Therefore, my blog will most likely talk about opportunities that are attractive in a 1 to 3 year time frame. Nothing wrong with other approaches, just that I want to make my approach clear. Let me know what you think.

  • Prem Sagar says:

    >Hi Deepak,
    Thx for clarifying your time horizon view.
    Here is what I think of time frame in value investing.

    1. Long term view works in favor of guys who have the patience and confidence to stay put even during distress.
    2. The toughest thing here is to pick the right stock that can be a true compounder of value.
    3. It needs good amount of insight into the companies and industries and methodologies to value them correctly.
    4. A business oriented investor approach is absolutely needed.
    5. It needs tremendous temperament to invest in out of favor stocks

    However, if you follow Phil Fisher, he was willing to pay high PE for stocks that were truly great. His idea was that great companies always sell at high prices. And his term was very long ranging from 10 yrs to 20 or more…and is something that is really tough since its very hard to predict that far!

    As far as short term is concerned, you have to take care that your analysis is correct and the prices at which you buy or sell.Here you dont have the comfort of time to help you out even when the fundamentals are great, but when the market thinks otherwise.

    From my own short experience, as a short term player, you need a lot of right moves! As a long term player, 1 or 2 good moves will catapult your networth a good deal.

    And most importantly in short term I have noted
    1. Need to limit losses. Sell losers first
    2. Ride the winners. Sell profit making stocks as late as possible. Ride them.
    3. But most of them do the right opposite, sell losers last and winners first.

    Short term needs
    1. Quickness in action and analysis
    2. Temperament to keep losses to minimum and to ride profits.
    3. Not get stuck to loss aversion and avoid selling loss making stocks.

    If you ask me, short term is as tough as long term too. You pointed out a few variables in long term that can skew things greatly. Similarly short term too has a set of different variables that are hard to fathom, like market mood and sentimentals for one.

    And people have definite bias. I have not seen (among non-professionals) anyone have both terms in mind and yet do well.

  • Prem Sagar says:

    >Hi Deepak,
    Thx for offering to help on my DW project. I have an existing excel system where I maintain my data and I am pretty well organized with it.
    Plan to move to Oracle based DW system so that I can make it more scalable and usable.

    Curious to know if you have any existing system in place?

    This is an area of passion for me,and I have well maintained data from 2004.


  • Deepak Shenoy says:

    >Prem sagar: Thanks for the comment. While I see your point, I would like to play devil’s advocate and counter a few of them.

    1. Fundamentals only tell you good stocks.The important thing to a small investor is to find the right time to buy good stocks. That is given by price/volume info, which is as easy to learn as fundamental analysis.

    2. If you use company releases for fundamental information, including earnings, you may be at the bad end of a deal – many companies are known to manipulate results (legally, and sometimes illegally) to make it look attractive. This includes things like deffering tax, changing depreciation parameters, non-reporting of FCCB dilution, marking quarter earnings etc. If they correct it retrospectively you then have a dud stock you thought was great.

    3. Long term buy and hold doesn’t always work. It’s less likely to work than doing a fundamental analysis and running a price action test on the stocks (relative strength, stochastics etc).

    4. Buy high, sell higher is a great strategy. In the US, some 20 year old multibagger stocks were rated at a higher P/E than other lower returning stocks.

    5. Long term analysis is usually marked with contradictions. What looks great from EPS growth may look lousy from a RoE angle. The correct indicator is only known on hindsight.

    Either ways, both short and long term have different parameter sets, but typically most multibaggers achieve their state in the 1-3 year timeframe (from bottom to top). This is specific to India.

  • Prem Sagar says:

    Thx for the reply. I dont deny a few of your points. I certainly think term strategies are different and people have definite bias over their term views.

    Ok, coming to your reply

    1. When one looks for long term, he also looks at a potential multibagger. So it is slightly irrelevant to do more price based research to time it… it doesnt matter if you buy it a 10-20% higher.. it still would be a decent multibaggger.

    2. For this, i would stick to Phil Fishers approach and would prefer to value based on a lot of things that are intangible in addition to financial data available. And a good way is to discount things with a margin of safety. (well, I can tell you the ideal ways to do…but frankly I dont follow these!! Infact, these days I have taken a break from direct investing!!)

    5.Pt 5 can be countered by checking what drove the growth in profits… to see if the same was funded by excess debts..driving ROE down. ROE always gives a decent picture on the growth, whether it was funded by continual dilution or internal accruals.

    There are certain indicators that surely raise +ve flags…but as always, such things may not repeat in the future.

    All said and done, both have their +ve and -ve aspects. And as there exist multiple paths to a destination, these are different views towards the same thing.. making a profit!!

    Wish you a lot of profits!

  • Deepak Shenoy says:

    >Prem: I am working on a project to import market data into a large SQL database. It’s a warehouse of sorts but I’m not using the standard warehousing techniques, but more traditional analysis techniques specific to stocks.

    I have excel sheets for my portfolio and goals as well – but I want to auto-import data into a database that stays maintained…

  • Deepak Shenoy says:

    >Prem, thanks for the wishes and you too, even though you’re not investing!

    1. multibaggers typically outperform in a short period is what I meant, and the deal is to find the right time to enter. Here’s a thought:if you had a four bagger in 10 years, is that worth it? That’s about 15% annualised.

    2. Even peter lynch has interesting thoughts on valuation. I don’t deny them. I believe you should fundamentally tick a stock and then choose the right timeto invest. The fundamental theories are important too.

    5. Unfortunately profit growth is rarely segregated. For instance companies with HUGE “other income” still are rated fundamental buys. And while RoE gives a good picture it is often a bad indicator in less capital intensive companies (like service comapanies).

    I don’t advocate any term to an investor – my own experience over the last 10 years has been fantastic in the buy-and-hold area, but now with some analysis I realise how I could have done even better.

    We’ve been spoilt by a huge bull run. I think having exit rules is important in any strategy, and discipline the most key. Either ways, the aim is to grow wealth, however we choose to do so!

  • Rohit Chauhan says:

    pretty interesting discussion. let me add a few thoughts for whatever they is worth.

    i used to focus on the duration (long term v/s short term earlier), however i do not look at it now.

    my approach is split into two broad areas. buffett type purchases where the business is sound, the company continue to increase its intrinsic value. as a result if i have the confidence in the company, i continue to hold it as my long terms results would be good, irrespective of short term overvaluations. such ideas a diffcult to find, but you can get a few once in a while, especially during bear markets.

    the second type of ideas are more deep value graham type of ideas. the companies do not have a substantial competitive advantage and hence their intrinsic value does not expand. as i hold these stocks till the gap narrows between the stock price and intrinsic value or 2-3 years whichever occurs earlier. typically you hold a more diversified portfolio and sell stocks which are near intrinsic value and buy one which are available at a discount

    If you look the above two approaches, the first ends up having a longer term whereas the graham type stocks have a holding of 1-2 or at best 3 years.

    i prefer not sell the truly exceptional businesses based on technical or short term factors.

  • Deepak Shenoy says:

    >Rohit: True, I think your points are very valid. We perhaps aren’t talking at cross purposes – our framework is the same except I choose a different horizon.

    Buffet type purchases are very valuable, and I hope we get more of them. But in general, commodity stocks that are high dividend yield, slow growing behemoths are few and far away as you said.

    Deep value Graham companies are also on my radar, though I tend to look at value once the market has show some signs of recognition. Take Balaji Telefilms for example – I recommended the stock at 126 in August 2006. The stock hung around these levels for nearly 6 months before it surged up to 230. I started noticing the move up in April 2007!

    I’ve owned the stock since it was Rs. 83, in 2004. At the time I invested for the value in it, plus the fact that it was giving nearly Rs. 16 as dividend. A dividend stock that quickly catapulted to a growth stock, picked up steam in about three months. It was a Graham kind of stock I think.

    I have one stock I personally have not sold at all – Ranbaxy. I’ve always bought below 350 so my buy price tends to be low enough not to hit my 20% stop loss, and for every such occasion I see a rebound to Rs. 400 – meaning that the sub 350 prices are temporary undervaluations.

    So perhaps we are in the same boat – or at least going to the same destination, but using slightly different ways to reach there.

    Thanks for your comment!

  • hari says:

    >Hi Deepak,

    I have a few doubts as well as suggestions. One of my friends the other day said that a relative of his owns 6000 stocks of Infosys. Had he taken a short tem view would he have been able to create a huge asset as he has done.Also another friend of mine was saying that he held DrReddys stocks from 1989. I accept that the fundamntals of the company must be proper in order to create such a huge asset. They were all advicing me to stay for the long term and in general accumulate good stocks like Ranbaxy , Mindtree etc.

    Also talking of long term (I mean atleast 20 years) I read an intresting column in a leading magazine where the author specifically picked the folloing 3 stocks which one could buy irrespective of the market position
    2) Hindustan Unilever
    3) Tata Steel
    Is it right deepak. Please give your views. Also could you please tell me which stocks are worthy of long term asset creation. Its ok if there are short term blips.But do you perceive any stock that we can accumulate over a long term for atleast 10 years.If you find any could you please suggest a few.

    Regards & Thanks

  • Deepak Shenoy says:

    >hari: Think of stocks like Bombay Burmah, Arvind Mills, Century textiles, Kinetic Honda etc. which were going great 15-20 years ago, and are nowhere now (in comparison). The last 5 years have been good but that does not mean it will stay that way. Today’s large caps may become tomorrows small caps!

    While you need a long term view, you will find that most stocks perform in a short cycle, typically 1-3 years. After that they stagnate for a while and then perform again. My funda is: identify those points (even after they have started) and then invest.

    My father owned stocks since the 80s. I have seen, out of every 10 stocks, only 2 have outperformed; the rest are either gone or are dud companies now. Have you heard of Onida Saka, or Parasrampuria group of companies? Of course, out of hte whole lot, the performers have been so high that I have six mega multibaggers, but nearly all of the growth in those companies happened in a three to five year period.

    HLL hasn’t moved much in the last two years. Infy has pressures that result from too big a size, and Tata Steel has a Corus behemoth to integrate. These companies may rise to these challenges, but are likely to face intermediate pressures on margins and therefore there is a better time to buy them than now.

    You have the right idea – to buy fundamentally strong companies. You just have to choose the right time; in my view choose the time when the market starts believing in them.

  • Harshit says:

    >Interesting thoughts and views from everyone thought I will add my 2 cents to it.
    I tend to agree with Deepak in a way that the market needs to realize a company’s potential for an investor to make some profits. Unless that happens or there are signs of that happening it is pointless in allocating a big chunk of your portfolio in such investments. Knowing how to play chess on an island full of dumbs never helps does it? On the contrary you might be classified as a fool playing with those tiny pones and board with black and white squares!! This fact kind of limits the universe of the stocks that one should analyze and think about getting into. Unless they are tracked by others its very unlikely that you will make profits in them even if they are quoting at half their net worth. It’s the fear of unknown that keeps other retail investors from getting into such stocks. So unless an MF or an FII realizes the company’s potential or the stock price is operated upwards profits are hard to come by.

    I have exercised the following approach successfully in the past. What I generally do is follow research reports from brokerage firms or analysts that I have access to. I also track the reco price. I do my analysis on top of it and then if I find the idea good enough I wait for a big down move for my entry into the stock. As usually just after the report is released the stock price jumps up. If the down move doesn’t come I do not enter and move on to the next stock. But if it does I am certain that the stock is well tracked and there are people selling the idea. And if I believed in “the idea” chances are others will too when the short term blip goes by. This is not the only way I pick stocks as I know the reports may have been released to offload their or their friend’s holdings and that’s why your own analysis is required. But it has been a profitable approach so far. I also keep a certain %age of my funds in the stock as trading capital and try to capitalize on short term moves say 3-6 months if I can. I always trade in the direction where even if I go wrong I will make a loss in potential profits. So if I go wrong I am covered but if I go right I move the realized profits usually to the same stock’s investment capital, If not to cash. That way I am generating equity. Never do I increase the initial trading capital allocated to the stock. I know this seems like an active process but I think its not and can yield good returns.

  • Poons says:

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