The S&P 500 was up more than 1% on May 14, 2011, and down more than 1.3% on May 15, 2011. Most of the S&P 500 stocks increased 2 to 6% on May 14 and lost the same kind of percentages the next day.
If you thought the market was going to turn up after a 7% decline, you might have bought stocks on May 14, 2011 thinking that, you don’t want to lose the upside. But the next day, those newly bought stock positions are in a loss. You might have thought, "I don’t want to loose more money," and to protect your money sold at a loss.
So how do you behave in this uncertain environment? To generate market-beating return, you should behave as mentioned below.
Stock prices are determined by the supply and demand for that particular stock on that day. Some days, the market is pessimistic. Supply will be more, demand will be less, and the stock price will drop. Some days, the market is optimistic. Demand will be more, supply will be less, and price of the stock will go up. Market mood changes depending upon that day’s economic reports or any other news which is related to the current pressing issues.
Here is some investing wisdom:
Look at this example. You thought a particular company's intrinsic value was $10 a share. You bought at $7.50 a share, that is, a 25% discount to intrinsic value. That is a good buying decision. After a couple of months, stock trade at $9 a share. You felt good. You made a 20% profit in couple of months, thinking of selling at $10 a share.
But the market downturn happened; your stock fell to $5 a share in couple of days of heavy selling in the market. Now you are 33.3% down from your purchase price. You are scolding yourself: "Why I didn’t sell at $9 a share? Now I lost my profit of 20% and lost 33.3% of my invested money." The stock may go down to $4 a share; you may lose more.
You are tense now. Hard-earned money is going down in front of your eyes. You have the urge to act. You try to protect your money and sell at $5 a share and take the loss. You will be thinking, "I will invest the remaining amount in another stock and try to recover my loss."
After you sold, after couple of weeks, the stock slowly reaches $8.5 a share. Now you are kicking yourself again, "why did I sell my position at $5 a share? Now the stock is increased to $8.5 a share." Most investors behave the above-mentioned way.
To generate market-beating returns, you should behave in the below-mentioned way.
You did your thorough research and calculated the intrinsic value of the company, which is around $10 a share. You bought at $7.5 a share — that was a good buy. When the stock reached $9 a share, you didn’t sell; you were waiting to reach $10 a share to sell the stock. That’s fine too.
Now the market crashed, and your stock fallen to $5 a share. Nothing changed in the company; you still believe the intrinsic value of the company is $10 a share. The market price only came down because of the macro environment. When the stock trades at $5 a share, the shares are trading at a 50% discount to intrinsic value of the company. If you have cash you can buy more. Now your average price will be $6.25 a share.
Or, you have other holdings. Some stocks are trading near intrinsic value or above intrinsic value. You can sell those stocks and raise cash and buy this bargain stock at $5 a share. You can hold the stock until it reaches to $10 a share. Now you made around 60% of your invested money. That’s the way you need to behave in these uncertain times. You should not panic and sell at the bottom.
Jeeva Ramaswamy is ardent disciple of Warren buffet and managing partner of GJ Investment Funds (www.gjfunds.com) which is a value-based investment fund focusing on US and emerging markets modeled after 1956 Buffett partnership. Since inception GJ Funds have consistently beaten the Dow, NASDAQ and S&P 500 indices and 95% of the mutual and hedge fund managers by a wide margin, and generated a 72% compounded annual return. He can be reached at [email protected]
If you thought the market was going to turn up after a 7% decline, you might have bought stocks on May 14, 2011 thinking that, you don’t want to lose the upside. But the next day, those newly bought stock positions are in a loss. You might have thought, "I don’t want to loose more money," and to protect your money sold at a loss.
So how do you behave in this uncertain environment? To generate market-beating return, you should behave as mentioned below.
Stock prices are determined by the supply and demand for that particular stock on that day. Some days, the market is pessimistic. Supply will be more, demand will be less, and the stock price will drop. Some days, the market is optimistic. Demand will be more, supply will be less, and price of the stock will go up. Market mood changes depending upon that day’s economic reports or any other news which is related to the current pressing issues.
Here is some investing wisdom:
- You should know more about the company you are trying to invest in or whatever the stocks which you are holding. You should have sense of intrinsic value of the company, that is, the worth of the company. If the market prices are trades at 30 to 50% discounts to your estimated intrinsic value of the company, add more stocks to your holdings. If the company stocks are trading at above or at your intrinsic value of the company, just sell it.
- The market should not command your buying and selling decision. You should act depending upon your calculated intrinsic value of the company.
Look at this example. You thought a particular company's intrinsic value was $10 a share. You bought at $7.50 a share, that is, a 25% discount to intrinsic value. That is a good buying decision. After a couple of months, stock trade at $9 a share. You felt good. You made a 20% profit in couple of months, thinking of selling at $10 a share.
But the market downturn happened; your stock fell to $5 a share in couple of days of heavy selling in the market. Now you are 33.3% down from your purchase price. You are scolding yourself: "Why I didn’t sell at $9 a share? Now I lost my profit of 20% and lost 33.3% of my invested money." The stock may go down to $4 a share; you may lose more.
You are tense now. Hard-earned money is going down in front of your eyes. You have the urge to act. You try to protect your money and sell at $5 a share and take the loss. You will be thinking, "I will invest the remaining amount in another stock and try to recover my loss."
After you sold, after couple of weeks, the stock slowly reaches $8.5 a share. Now you are kicking yourself again, "why did I sell my position at $5 a share? Now the stock is increased to $8.5 a share." Most investors behave the above-mentioned way.
To generate market-beating returns, you should behave in the below-mentioned way.
You did your thorough research and calculated the intrinsic value of the company, which is around $10 a share. You bought at $7.5 a share — that was a good buy. When the stock reached $9 a share, you didn’t sell; you were waiting to reach $10 a share to sell the stock. That’s fine too.
Now the market crashed, and your stock fallen to $5 a share. Nothing changed in the company; you still believe the intrinsic value of the company is $10 a share. The market price only came down because of the macro environment. When the stock trades at $5 a share, the shares are trading at a 50% discount to intrinsic value of the company. If you have cash you can buy more. Now your average price will be $6.25 a share.
Or, you have other holdings. Some stocks are trading near intrinsic value or above intrinsic value. You can sell those stocks and raise cash and buy this bargain stock at $5 a share. You can hold the stock until it reaches to $10 a share. Now you made around 60% of your invested money. That’s the way you need to behave in these uncertain times. You should not panic and sell at the bottom.
Jeeva Ramaswamy is ardent disciple of Warren buffet and managing partner of GJ Investment Funds (www.gjfunds.com) which is a value-based investment fund focusing on US and emerging markets modeled after 1956 Buffett partnership. Since inception GJ Funds have consistently beaten the Dow, NASDAQ and S&P 500 indices and 95% of the mutual and hedge fund managers by a wide margin, and generated a 72% compounded annual return. He can be reached at [email protected]
