If only we could sell

On hindsight the previous bull market had given us a fantastic opportunitiy . If only we could sell . This is of course on the assumption that we had invested in stocks earlier. For it is only when sales are made that profits or losses are booked . Since the previous bull run was one spanning a multi year time span , one could end up with profits only. And now the clock has turned almost full circle , meaning prices are at levels last seen in most cases by as much as decade earlier. The Dow Jones Industrial Average , which is by far the most tracked index , fell from 14093 on oct , 08, 2007 to 6627 on Mar, 02, 2009. this later figure was last recorded around Dec, 1996.

Markets which have fallen to lower levels present an opportunity for acquiring the same or an equivalent basket of stocks and still leave money to spare or buy more. This is too simplistic a scenario though and used only as an illustration . For instance if resorted to at an early stage of the market decline which has been one of the most ferocious ever, there can be a genuine cause for heart burn. But the basic tenet remains firmly the same, that is, sell one must . Because by not selling one becomes a collector and will have to put in additional money to continue participating in the market. This may not be always possible. But more importantly one will not be able to profit from the cyclical market ups and downs and in the long run may end up with no profits as also loosing on the time value of the money.

Another very important reason to sell is that once stock prices reach heady levels it literally falls due to its own weight. It takes a great deal of buying pressure to elevate and maintain prices at high levels. Which means a buying climax will surely be followed by a withdrawal of such pressure as there can not be an endless presence of buyers and the market will be exhausted of buyers sooner or later. It is here that an opposite activity occurs. It is precisely at these times that some people start pressing speculative sales. These are people who assume prices will fall from that point on and put in sell orders without actually owning the stocks. In fact the derivative market has essentially such mechanisms. With absence of fresh buyers and addition of speculative sales the demand supply situation gets severely distorted and prices take a tumble. No wonder investors stare, in utter disbelief, at the disappearance of the wealth they thought were theirs. Its a different thing though , and not pertinent at this point of discussion, that these sellers will have to cover up their position by buying back what they had short sold. Such counter buy order reverses the downward spiral and prices recover, the extent of which again depend on several other factors. One such factor could be, interestingly, the reemergence of buyers who believe prices will go up. Their buying push up the prices again. And the game goes on.
It is thus seen that selling becomes a very important factor in the quest for profitable investments in stocks.. By selling we not only are able to buy back at lower prices without requiring additional money but also are favourably positioned for the next upmove.

Yet inspite of very strong reasons to sell, we fail to take that decision at the right time or when we do take, it usually is the most ill timed. Many people have had that agonising experience of seeing the prices of their most preciously held stocks start moving up after they have sold . While there can be several reasons why selling becomes a difficult proposition, one very common and important one emanates from our emotions , which essentially is that we are normally biased towards buying. We tend to associate buying with a sense of optimism in mind and having to take a sell decision appears to negate the optimism. To a certain extent most people are conditioned into a buy bias as buy advises around us far outweigh sell advises . There are numerous instances where the bias against selling is so strong that one is fiercely determined to hold on even when losses are staring at the face and mounting. And if the investment has appreciated we want it to appreciate more . This is the greed factor.

We therefore have to overcome our emotions, keep a clear head. It is not easy and we have to muster as much mental and emotional discipline as we can for that all important sell decision. How do we go about doing that . Here are a few indicators which if recognised will help us to take a rational view and proceed with our objective that is making a profit on our investment.

1. Sell if justification for fresh buying cannot be found . Meaning if you don't want to buy then sell it if are holding . By not selling one is holding the stock. Holding the stock is justified only if it is expected to rise. Its different if one is holding for dividend income .
2. Do not hold a stock unless it is worth a buy. A decision to hold is the same thing as to buy afresh. In a way it is the same thing as reinvesting sans the buy sell procedures and brokerage charges.
3. Sell when the fundamentals turn for the worse. Whether it pertains to the company or to the economy as a whole, monitoring developments by way of access to reliable news sources is very helpful .
4. Delete the cost price of the stock from mind. Remember, the rational to sell a stock is quite independent of the acquisition cost .As explained above one decides to sell because the price is not expected to go up any further and in all likelihood fall from there on. One is selling either to book profits or to prevent further losses if the investment has gone wrong. Its extremely difficult to maintain such a strict frame of mind but it is here essentially that a distinction can be made between an average and above average investor.

Happy investing

Are stocks worth investing in

For anyone who has looked at the stock market during the last 1 to 1 1/2 years has probably turned aghast at the extent to which stock prices have fallen. Between Jan 08 and Oct 08 the BSE index has fallen by about 64% i.e. fallen to about 1/3rd of its peak value. Many high profile so called popular stocks have been reduced to as much as 1/10th to 1/20th of their peak value. For anyone who had put in money around this time it probably has been a shattering experience and the wealth so lost might not be recoverable easily. This therefore raises a very fundamental question . Is it worthwhile to invest in stocks or are stocks suitable only for gamblers. An important question at this point could equally be how many people asked this same very question at the peak of the bull market and exited the market. If they did, then they would be, like the proverb, laughing all the way to bank.

Lets face the facts . Stock markets are not gambling dens. Stock exchanges, where stocks are traded, are public institutions where millions of people engage in buying and selling of stocks and are regulated by government. As regards other avenues of investment i.e. the traditional real estate and gold etc, well real estate also had its share of fall too. There is a property glut at present as evident from large number of unsold properties and discounts of whopping 30-40 % . Besides property has with it an attendant maintenance expenditure as also the stamp duty etc. which basically boils down to reduced return on investment. Then, not long ago, we were grumbling on measly returns on FDs . Gold did not appreciate for a considerable period . Whereas anyone who has been able to catch the bull market which started in 2003 and remained invested has succeeded in making handsome gains in spite of the downturn. It therefore appears that stocks cannot be ignored for getting above normal returns. The question can then be, if stocks cannot be ignored, do people have to loose money buying stocks.

Not if we understand how the stock market behaves. Following should explain very briefly.

Stock prices continually change, in that it keeps going up and down. Our nature is such that we always want to wait for prices to go up still further before we sell and vice versa i.e. we go on postponing the buying decision expecting prices to fall further. But this never happens in reality however much we want. And at some point the trend reverses itself and in most situations leaving no time for people to grasp what happened. And before long, gains are wiped out and losses mount. This is the greed and fear factor. All of us are prone to it. He who has conquered it is already on way to profits. Whether profits will be made depends on a few other aspects.

One is, to get an indication of whether a top or bottom is close by , for it may never be possible to catch the exact top or bottom. It is best to keep an eye on previous year high. If the prices have reached a level where it has greatly exceeded previous years high, it is time to sell. And we shouldn’t bother if prices still go up further for it will invariably come down but profits will have been captured. Look out for the frenzy in buying where people start buying all sorts of junk stocks whose prices reach abnormal levels and IPOs start flooding the market . By all means sell at these times. Getting a clue on whether a bottom is at hand is more difficult and a little risky too. While in the case of a bull market one will have made lesser profit but in the case of a bear market one stands to loose if the buying decision goes wrong and prices correct further. However few generalistions appear to work . Look out for the absolute apathy where people just don’t like stocks. The market is dull and listless and doesn’t react to any kind of news. A large number of good quality stocks record new 52 week lows . In both the extremes markets gets detached from realities of economic fundamentals and represents an aberration . This signals an imminent trend reversal.

The above illustrates when major tops and bottoms are formed in long term bull and bear cycles. A long term investment strategy focused on these cycles is more likely to generate extraordinary returns when compared to short term strategy.

Happy investing