No Stock Is a Dud

A common complaint in the stock market is that stocks move up after you have sold them. During the time you hold onto them, they simply refuse to budge or rather head for the South Pole. Meanwhile, you find that many other stocks are racing up. This causes you to shift to them, and lo, you realize that they have stopped moving as well!

Then there are those you switch to so-called “better” companies from the “lousy” ones in order to benefit from the secular rise the better companies see. After some time, they discover that the lousy ones have raced ahead of the better ones.

One rule that comes handy in such situations is “No stock is a dud.” If a stock clears your criteria, you must hold onto it without getting swayed by the movement in the stock price. Don't sell it to buy something else—no matter how good the new opportunity appears to be. If a company does well, eventually it will be rewarded. Don't worry about the momentum either. Stocks can race really fast and make up for a lackluster performance in a few days.    

Even those stocks that every analyst and expert stays miles away from can show tremendous appreciation. In the current scenario, commodity stocks can well throw a surprise. Timing also matters. A stock that you bought at Rs 100 when comes down to Rs 25 is a nightmare. But if you buy it at Rs 25 and it goes up to Rs 50, it becomes a sweet dream. Again, the point remains that you should never underestimate the power of a common stock.

What to Do about Commodity Stocks

Commodity stocks around the world have taken a serious beating. A slowdown in China, a major consumer of commodities, is blamed to be the underlying cause. Added to this is the soaring crude-oil supplies, which have sent the oil prices at multi-year lows. Experts and analysts are asking you to stay away from commodity stocks till the “cycle” reverses.

Commodity companies, companies that manufacture metals and oil and gas, are termed “cyclicals”— maybe because their prices move up and down in a cyclical fashion. So experts say that the right way to invest in such companies is to ride them during an uptrend and dismount from them (or stay away from them) during a downtrend.    

I don't know anything about cycles. Nor do I recommend following them. However, what I do know is that many commodity stocks are currently trading at throwaway prices. Don't go by valuations as they could be misleading. Since earnings have been down for many commodity companies, they will be trading at either high price-to-earnings (P/Es) valuations or no P/Es (which means they are currently in loss).

It won't be a bad idea to take small exposures to the leaders of the sector. By “leaders” I mean the biggest companies in the sector. Don't buy for the full amount; buy in stages. As and when a turnaround happens, you will see their stock prices racing up. Don't wait for the bottom. No one knows when the bottom will arrive. The financial community may be looking at the cycle, but what I can tell you for sure is even when the cycle changes, it will still be looking at it for “clearer” signals. The stock market can move really fast and that too before any recovery is in sight. Your best bet is to pick the beaten stocks when they are writhing in pain, not when everyone else also gets into the buying mode.     

The Bear Is on the Prowl. What Should You Do?

Stock markets have again entered the bear territory. The reasons cited are many, ranging from the falling crude to the slowing China, to the US Fed increasing rates. Analysts and experts are suggesting that you should delay buying stocks as they can fall even more from here. They are asking you to stay away from certain “risky” companies and take shelter in “defensives.” Some of them have shunned the job of advising on shares and are asking you to buy mutual funds, thus passing the buck to fund managers. The financial community is speculating whether 2008 is back. 

I don't know whether 2008 is back. What I know is the way specialists are reacting and confusing the layman isn't new. In Stock Market Investing for Employees, I have dedicated a full chapter to stock-market crises and how to handle them. This chapter was important as crises are inseparable from the stock market. They will happen whether you like it or not. And when they happen, you need to do just nothing. You just need to stick to your stock strategy. Should you delay buying? No. If you have money, you should be buying no matter where the market is headed. If you wait for the ultimate market bottom, you may be waiting forever. The market may rebound and you may be left waiting.

The views of the financial community are pointless because they are not absolute. They are a function of the way the market is moving. If the market goes up, the financial community will support the rise with positive arguments. If the market falls, it will find enough doom-and-gloom reasons to worry about. The result: The average stock investor is clueless as always. 

As a stock investor, you would do well by focusing on the company rather than on the market itself. If the company deserves buying, you should be buying it. Don't wait for the elusive “better” deal. History does repeat itself in that market downturns do happen. The best response to them is to do whatever you would have done if they weren't there.  

Should you invest for growth or for value? It doesn’t matter.

The world of stock investing is not only full of jargon but also theories. Two theories of the many theories are growth investing and value investing. Going by conventional definitions, growth investing seeks to invest in those companies that have above-average chances of growing their revenues. Value investing, on the other hand, is about investing in those companies that are unappreciated at the moment and could get rerated.

Which is better? Which should you follow? It hardly matters.

When you invest in stocks, you are always better off keeping it simple. How does it matter if it's a growth company or a value company? Remember just one aim: Make money. You invest for no other reason but to make money. It doesn't matter what theory you apply.

Growth investing and value investing aren't the only two forms. There is “momentum” investing and there is dividend investing and what not. The financial community has devised numerous terms to make stock investing confusing for the layman. What's more, when investors practice one theory, they feel that that's the best theory. They show more allegiance to their theory than the obvious aim of making money, which only limits their options, outlook, and prospects of success.

Why be just a value investor? Why be just a growth investor? If you can make money in multiple ways, why stop yourself. The more ways of thinking you have the better investor you become. As a matter of fact, if you can keep conflicting ideas and use them as needed, you can do really well—at least in the stock market.

Want to Be Successful at Stock Investing? Don’t Work in the Financial Industry!

Contrary to what you may find obvious, your chances of being successful at stock investing will actually diminish if you choose to work in the financial industry, especially if you begin your career there. This is because you will be so overwhelmed with the barrage of stock-investing “wisdom” that you may decide never to buy stocks, at least directly. Little of this wisdom is actually useful. 

With stock investing, there is just one rule you need: Ignore almost everything. The financial community tries really hard to make itself useful, but in this pursuit all it does is add to the unfathomable pandemonium. And while it adds to the preexisting intricacy, it also overlooks the simplest things. An analyst may care more about the internal rate of return (they call it IRR, yawn!) than what is obvious. He will take great pride in digging out some obscure aspect of some company rather than pick what is there in front of him. An analyst is someone who, when he sees a dog growling and ready to pounce at him, takes out his digital device and studies the data to find the probability of being bitten by an angry dog.

Those who start their careers in the financial sector will have their blank mental templates all written with traditional (and ineffective) rules of finance. Unless they challenge what they are learning free of cost with some “non-mainstream” stuff, they will eventually find themselves speaking the traditional language of finance. With traditional wisdom, you can’t expect great outcomes.

So, what’s the message? I am not saying that you leave your jobs at the financial industry. What I am saying is that your chances of success at stock investing will be better if you keep it simple and sensible. You don’t need the analyst. You don’t need the advisor. The fewer chefs you have the better your broth will be. For those who are already working in the financial industry, expose yourself to disconfirming and conflicting knowledge and wisdom. You will do well by challenging what you already know and adopting newer ways of thinking.   

Beware, Are You “Emotionally” Invested in Your Stock?

In the stock market, it is frequently seen that investors invest not only their money but also a good amount of self-esteem in their stocks. This is particularly true for fundamental analysts. The business of stock picking is one of the worst avenues to tie your self-worth with because you can easily go wrong with stocks. While going wrong with your stock selection isn’t much of a problem, sticking to a bad stock just because you have picked it certainly is. In the stock market, smartness lies in realizing when you are wrong and taking action.

Why do fundamental analysts fall prey to their own analysis? Because they have invested a lot of time in analyzing the stock and coming up with a story. In the process, they fall in love with their own brilliance and logic. So, when they find contradictory developments pulling down the stock, they take them as a blow on their egos. As a result, they stick to the stock, only to see it tumble further. Rather than appreciating the contrary developments as a negative, they interpret them according to their biases. On the other hand, a technical analyst is more nimble and quick to appreciate an error. This is because his judgment comes not from “inside” but from “outside,” i.e., from the charts and patterns he sees.

Though I don’t practice technical analysis, given its own problems, I support a model-based approach to stock investing. Models are complete systems that tell you what stock to buy, when to buy them, how to track them, and when to sell them. They shift the task of analysis from “inside” to “outside.” So, when you are wrong with a stock, the model will tell you and you need to act. When you are right, the model will tell you, so you need not worry about the market’s ups and downs.
 
The success in stock requires not only picking winning stocks but also containing your losses. Those who are dispassionate about their stocks actually have better chances of succeeding. Call it a paradox if you will.