I often ask myself why people find it so difficult to invest for the long term in the stock market. There are so many trading and demat account holders in India. But so few who are successful investors. My thoughts on this:
These two approaches are so different that perhaps the first step for a novice new investor is to try to understand both these concepts and decide which approach he should start with.
Once a person has decided to be an investor, the next big lesson is to learn 'the Investing Instincts'. And the biggest of them is to resist the Herding instinct.
People collect or herd together in their decisions. They follow the larger group and blindly copy their decisions. But investing in the fundamentals of a company involves understanding the business of a company and taking rational decisions.
The challenge to such fundamentals based investment decisions are events within these time spans that cause large share price movements. It could be a Modi government win that causes a 30% upside in the overall market and your investments appreciate 50% (a good problem to have). Or it could be a 10% fall in the market that may cause the firm's share price to fall 20%.
The opposite of the Herding behavior is Contrarian thinking. The Calm investor has to only make 5-6 big Buy or Sell decisions every year.
Take the current fall in markets. It seems to me that the Sensex move from 20,300 on 7th Feb 2014 to 28,800 on 28th Nov has been a 42% gain over 9 months almost without a break. All big gains are interspersed with small corrections (and the converse). The fall has been anticipated many times over the last 2-3 months. Nobody can predict it accurately. But it is almost a consensus now in the market that there will be a fall.
The investor needs to stay calm and take advantage of it.
Punit Jain is the Founder of Bangalore based firm, JainMatrix Investments that offers Equity Research and Portfolio Advisory Services.