November 28, 2008

Anger and frustation

I was planning to publish the post below today, but then these attacks happened in mumbai. I am extremely angry and frustated, partly due to the fact that I have lived a considerable part of my life in mumbai and still have a lot of friends in the city. I wish I could write more. My only hope is that if you belong to mumbai, you and your family members are safe.

To buy or hold ?
Almost all markets, worldwide are dropping almost on a daily basis. Just as it was a no brainer last year to buy some stock and watch it go up, the reverse is happening now. I have received comments and emails asking if the right strategy in such circumstances is to wait for the bottom ?

Most of you, who have made any purchases in the last few months, would have seen the prices drop further. A common reaction is to regret the purchase and to think that holding out would be much better. I used to be prone to this ‘hindsight’ bias too. It is very common to see ‘hindsight bias’ in both bear and bull markets. After the event, you will feel or others will tell you that it would have been good to hold out (in a bear market) or to have bought (in the bull market).

Hindsight bias
This is faulty thinking. Although Hindsight is 20/20 , you cannot invest based on hindsight. Does anyone know how the market will do in the next few days or months or a year ?
If you do then you should buying options and betting on the direction ( I have done that a few times in the past). However when investing for the long term, based on underlying business value, timing cannot be perfect. As I have said in the past, if the stock looks undervalued by a large margin, create a 20-25% position. You can later add to this position as the price changes.

I typically create a 20-25% position and then start buying more if the price drops. If the price increases, then I will just hold and do nothing. The problem with this strategy is that it works well in bear markets, but fails in bull markets. During bull markets, such opportunities are quickly discovered and the price adjusts accordingly. This strategy could save you money in bear markets, but cost you in a bull market.

I am currently looking at CRISIL closely. I have written about it
in the past and will publish some analysis in a subsequent post.

9 comments:

Vidyanshu said...

Dear Rohit,

I am from Mumbai. My commiserations and condolences to anyone who has been adversely affected by this frontal attack by terrorists.

About the markets, I think there will be more disasters uncovered in the US/Europe and in a chain reaction Japan/Korea/China/Asia etc...I think at times like this one needs to be a bit more patient till the messy part is over and the revival starts. It will be a slow affair and anyone alert enough will get a chance to get on-board for the next train ride.

Meanwhile, one needs to create a shopping list.

Bon Appetit.

Vidyanshu.

Rohit Chauhan said...

Hi vidyanshu
not sure if we can time when all the issues will end and the markets will turn. a lot times the markets turn 6-8 months before the bottoming out.

my approach is look at the good companies which i always wanted to buy and could not due to the valuation. the coming months may provide an opportunity to pick such stocks

regards
rohit

Vic said...

Hi Rohit,

I agree with you. But at the same time, it is extremely difficult to follow.

So far I have been able to stick to my planned AA for the most part, will be a good experiment to see how it plays out in the long term.

Mumbai attacks are very unfortunate. Life is uncertain..or always is in the material world. I was hanging out in the same Taj earlier this year with my wife. Could never imagine such thing happening.

Vikas

sam said...

Hi Rohit,

I am also tracking companies like Crisil since long but am also waiting for the right price to buy.
I consider buying business like CONCOR, CRISIL, PIDILITE, which are virtual monopolies.

Rohit Chauhan said...

vic
what do you mean by AA ?
you hang out in the taj ..rich man !

sam - crisil is now in my target range ..so i have been buying. i have also been adding a bit of concor

regards
rohit

JayGal said...

I remain cautiously bullish on India over medium-long term. Short term there would be volatile movements in markets till May/June 2009. Technically Nifty 1975 looks a Bear Bottom to me. Money like water will finds its way, if India recovers from temporary slowdown, new money is bound to come to equities! Being in Debt now would give 'short term safety but long term pains', whereas starting to invest in Equity may give 'short term pains but long term gains'. Returns immediately after a bear market has been historically much higher than average returns in Equities. This leads me to believe that Equity allocation in 2009 spread over 6 months (Jan-June 2009) would most likely outperform all other asset class returns on 2-3+ year horizon.

Vic said...

Rohit,

I meant Asset Allocation i.e. my AAPlan..primarily the equity/fixed income ratio hasn't changed. I'm still invested in equities.

Not Rich at all..:-) We were just window shopping, I'll do a coffee or Dinner @ the max, will never stay there. We were waiting for a friend to try Kathi Roll @ Bade Miyan..which is right next. :-)

I have changed my lifestyle after reading more about Gandhi and WB (what a contrast!!)

Vikas

Vic said...

Hi Rohit,

I assume CRISIL is part of your Core Portfolio.

Thanks,

Vikas

Anonymous said...

Rohit,

Why you do not consider ICRA? It has better operating margin than CRISIL. Market share of ICRA is also increasing and it is available at PE of 16 compare to CRISIL PE of 20.

Thanks
Prashant