Don't Drink & Drive..!!!

DON’T DRINK & DRIVE..!!!

Many investors I have dealt with get into this trap of what I call “Drink & Drive”. Buying and selling a security is a matter of decision to be taken in one’s conscious mind, with complete clarity, confidence and knowledge of consequences of the decision. Quite often markets send you such gens, which induce you to think and act that very moment, as if the world is going to end otherwise. Many investors tend to drink & drive at these moments, leading to short-term oriented decisions, turning into speculation, and never be able to capitalise the real return that markets can deliver in the long term. 

Observe the data table provided at the end of this article, which simply gives the returns that BSE Sensex, one of the oldest index of India given since its inception in 1979 (Source: www.hdfcfund.com). A detailed glance into this and you should be able to notice that, an investor who has stayed invested for a longer period has gained more consistency in his return earning capacity, as evident from the standard deviation presented at the end of the table. Simply, put risk has been almost nil, if you have been an investor in Sensex for more than 10 years. 

Hope you assumed the moral of the story. Now let’s examine, why this happens. When you invest for a shorter period, one-year for instance, you are giving the market and the company – whose stock you purchased – a period of one-year to grow from its current position and deliver. And this growth is what will have to reflect in the stock price. Practically and in the normal course of any business, this is close to impossible and if occurs also, would be one of the events and definitely not a sustainable one. And it would be an unscientific method of investing if you expect such miracles and buy a stock. Instead buy the stock, give it time to grow, let it reflect in the stock price, and earn the return that the company has actually earned and distributed.

Don’t get carried away by the mouth-watering ‘tips’ of brokers. There are brokers or employees of brokers who give you tips on hourly and daily basis, latest in the line is BTST (Buy Today Sell Tomorrow), all aimed at maximising their brokerage revenue and exact opposite inducement for what you should be doing. Remember, more number of times you transact (buy or sell) more is the brokerage you pay. While it is not wrong or evitable on the part of stock broker to earn his revenue, your ignorance can incline him to tempt you to transact more. 

You go to a vegetable market, the vendor will tempt you to buy from him or buy more from him, but you decide not based on his persuasion, instead based on your need. All I am saying is follow the same logic while you are shopping for stocks. I reiterate, don’t get tempted, have composure, be conscious and then take your decisions. Don’t Drink and Drive.

Table-1: Historical Returns of Sensex

 

Author is a Faculty in Finance and a PFP Consultant

Know more about him:

@ www.facebook.com/followkiran

@ kirankvknet.blogspot.com

@ kirankvknet@gmail.com