Buy Right, Sit Tight!

This is famous quote from Jesse Livermore who is famous for making millions of dollars fortune and losing it all many times in the stock markets. His stock market experience and learnings are documented in Reminiscences of a Stock Operator written by by American author Edwin Lefvre, remains a gift to the stock market players.
Even though these are just four words the quote has very deep meaning and a lot can be said around. Buying right is the key to investing the markets. Now right doesnt necessarily stand for time dimension even if it is important but it is meant for right value.

Fundamental Analysis is the key
A fundamentally strong stock will perform well for the years to come provided it keeps doing progress in terms of revenue growth, expansions and bottom line keeps improving. So while buying a stock for investment, horizon should be around at least 3 to 5 years. A fundamentally strong stock does not necessarily be the leader of the pack. It also doesnt mean that it has given some technical break out signal. Instead it can be a low lying stock, not very famous but doing good year after year. A fundamentally strong stock means it has significant growth pattern over years and strong order books. Company manages the cash well and debt burden is very low. It should have decent market cap to survive the hiccups in the short term. Looking for such companies with good valuation can be a tedious job as they may not be in the limelight.

There are many methods to identify a fundamentally strong company which will be addressed separately in another series of articles.
Once you identify such stock, you need to accumulate good quantity of it. The buying period can be spread over a month or two while we verify our selection. And once you are convinced about the analysis then buy full quantity and believe in your own conviction. Sometimes it may go wrong and sometimes it may be a dull period in the market when you enter. Timing the market here is not an important rule of the game but you need to be well versed with the macroeconomic conditions and sector wise demand supply conditions.

Long term investment is a well thought process of observation, analysis and conviction.
You need to keep your senses on alert and pick any information related to your investment ideas and analyze it together with the previously collected data. This is an ongoing process and acquired habit of systematic approach can produce results beyond your expectations.

But to achieve those spectacular returns you need to be very patient too. Because normally people can sit on losses for years to come with great hope of making profits but can not sit on profits as they fear that it may not last and the position will again move to losses.

But it has to be kept in mind that correction is inevitable in the markets and so is the rally. So instead of getting restless with the fall in the prices and follow the urge to switch, you just need to look at the fundamentals. They dont change overnight as the price does. So if fundamentals are intact then no need to be bothered with the price fluctuations over short term.

Some serious deterioration in the fundamentals can lead to losses but booking losses is also inevitable when we are dealing with the stock markets. Again accepting the mistake as early as possible is important. This saves us from further decay in capital at the same time if you are seeing a profit making position you also need to be holding the position as long as the fundamentals are intact.

Multifold profits can only be made over long term position.
Shorter period trading can produce profits but they are limited to certain two digit percentage of the purchase price.

We can relate this to the current situation too.

Past 1 year we have seen a surge in the stock prices. Markets too hit all time high values. As the stock market went through correction in 2008 2009, many investors were stuck with their holdings purchased at a peak level. There were very low volumes for almost 5 years. Cash volumes at the peak in 2008 were around 40,000 Cr which contracted to near 10000 Cr till 2013. It is only in the recent couple of months when the cash segment volumes are steady around 15000 Cr and after the new high in the Indices they have peaked to 40,000 Cr levels.

The optimism is certainly seen now in terms of participation of the retail investors. FII flowing in stock markets are pushing the stock prices to newer 52 week highs. Now the stressed out investors for past few years seems to be happy and will definitely want to book the profits. And it is fair to think so considering the pain of loss over past few years.

But with changed leadership and optimism in the global markets there is room for further big movements in the broader markets. It is not advisable to give up all the positions in the stock markets with whatever profit we have right now.

Here is the time to sharpen your analytical skills, buy a fundamentally strong company and sit real tight on the position.