Time and Price
Two very common questions for anyone dealing with the stock market
When to enter and when to exit the stock market?
What price to buy and what price to sell?
In this article I will try to explain why both the above questions are irrelevant and why they don't deserve your time and thought. Besides holding you back from making intelligent investment decisions these questions are unnecessary distraction from your actual work in stock market and that is finding gems to invest in.
Stock Market and Numbers
In general people try to analyze numeric targets for both time and price however stock markets don't work that way. Stock market is more qualitative in nature than quantitative. I can understand that this will be hard to believe when all you see on stock market is a screen full of numbers. But those are not meaningless random numbers, they are just numerical representation for all that is going on in stock market. What is going on in stock market? Well lots of things, but before we go to that let's get the random numbers and chart patterns out of the way.
Do you mean to say numbers have no significance?
Well that depends on what is your trading style. Numbers are micro trends and usually used by algorithmic and automated trading experts who execute trades at microsecond frequency and mostly earn from trading volumes. We don't fall in that category, we aspire to be value investors and for us second by second stock price numbers do not have any significance. For us what is significant is the quality and health of the underlying business and its future prospects. Trading on numbers on the other hand is more like scavenging on micro variations in the stock price which works for big institutions and hedge funds but we will never be able to compete with them and we don't need to. It is a dog eats dog world out there. Our world of value investing is a beautiful one.
What about stock charts and chart patterns?
It is a scam and I know that this is a bold statement but trust me it is a scam. You will see lots of books and articles on different chart patterns and how people make money by identifying chart patterns and extrapolating future direction from it and then trading based on it, but nobody writes about how many chart patterns fail every moment in different stocks as the prices come ticking in. If you were to write about failing chart patterns then you could write a new encyclopedia for every ten pages of successful chart patterns. Also chart followers have tried their best to fool everyone by coming up with tons of chart pattern so that any random graph will fit at-least one of those. This is how they can manipulate your thinking to make you believe that stocks follow chart patterns, by hiding the many failures and showing you only the few successful ones again and again. Unfortunately this game has gone on for so long and has so many followers now that some of the well known popular chart patterns do work because of manipulatively trained crowd psychology that are continuously trying to identify these and trade it in a coherent manner based on the common understanding of the chart pattern. But trust me, you don't want to be a chart zombie in stock market. If you go down this path, most likely you will end up with net zero gain over a long period of time and large number of trades, and you will spend your life pursuing the art of identifying patterns out of randomness and will always be dissatisfied with yourself and your success. It is the elixir of youth or immortality that does not exists.
Let's do some fun exercise
Below is a NIFTY chart with part of it wiped out, try to predict what happened between 11:00 to 13:30. Full chart given at the end of the article.
So charts are completely useless?
No, depends on how you use them. They are best used as current and past trend indicators instead of future trend predictors. Don't look at the chart to figure out what is going to happen in the future, look at it to understand what has happened in the past. What has already happened is the absolute truth and charts provide the best snapshot for it. What will happen in future, the charts definitely have no knowledge of that. You would be making a better use of your time having a conversation with the charts about what it knows rather than doing random talk about what it doesn't. I do talk to charts regularly and they often tell me that they are pretty unhappy about people constantly asking them about future they don't know, nobody talks to them about what they know very well :)
So what is going on in the Stock Market?
Now coming back to the original question, what is going on in the stock markets? I told you earlier that lots of things happen in the stock market continuously. These are news and events. Starting from when a company is listed on the stock exchange there are continuous news flows about these entities in the stock market. Latest happenings, business updates, quarterly results, rewards & recognition, order wins, research & development, shareholder meet, general meet, analyst meet, future plans, new discoveries, fund raising, dividends, corporate actions, company policies and plans, ranking, rating and reviews, shareholder approvals for different changes to the existing structure and a lot more. Like I said a whole lot of things, cannot list them all here. Similarly there can be negative news flows also like regulatory action, client loss, business setback, impact due to fire incident, natural disaster, market conditions, competition and loss in market share, product failure, fraud detection, stock manipulation and again a lot more. There could be turn around events like business restructuring, loan agreements, new management, new promoters, merger and acquisitions, de-mergers and divestment, monetization of assets, again lots of things. These are price impacting events for a stock and this is where you should spend your time on. This is what will give answers to your questions regarding when to buy or sell and what price to enter or exit.
When to buy and sell?
So a perfect time to buy a stock is when there are no bad news or events about a particular stock in present, hopefully none in past too or at-least all the bad news in the past have been properly responded to and brought to a proper closure. Even better if there are lot of good news anticipated in the future with specific milestones both in terms of deliverable and time.
A perfect time to sell is when there is a negative fundamental change in the stock and the very reason for which you decided to invest in the stock has been violated due to this new development like failure in business, regulatory and governance issues, loss of brand name, etc.
Once you have invested your hard earned money into any particular stock, you need to follow it up like a bloodhound, you need to read voraciously about it and keep yourself updated with all the latest developments in the counter. Stock market is a very fluid and dynamic place where things change very fast. If you are slow to follow it, you will be left behind and nobody cares here for people who are left behind. It is a momentum place and you have to keep up.
Note that just keeping up-to-date is not enough, you need to develop the skills to analyze news and events and you have to be smart enough to differentiate between temporary and fundamental changes. Will cover this some other time.
Trade off between short and long term
One may argue that the stock price keeps changing all the time irrespective of the news flow.
Well that is just noise, short term trends that won't even matter in a longer time frame and is not worth focusing on too much. Remember the trade-off article I wrote sometime back. Always look for trade-offs that will give you maximum benefit. Focusing on short term noise will give you sleepless nights, while focusing on long term fundamentals will give you insights, wealth and stability.
What price to buy and sell?
This is tricky but the best way to optimize it is weighted SIP. Don't go for regular robotic unsupervised SIP, go for proactively managed SIP. Once you have decided on a stock and everything looks good just SIP into it and add it to your portfolio at whatever price it is available currently and then track it closely. If the reason you bought it for strengthens, your goals are being met and you are getting timely confirmation signals, keep on adding to the SIP. If you have doubts, slow down or pause it. If the company fails to deliver what it promised or there is a bad event that you could not envision earlier, consider exiting or reducing your holding in the stock again at whatever price is currently available in the market.
Note that I am not saying that we need not worry about the price at all which is contrary to the principle of value investing and margin of safety. However good investment opportunities with high margin of safety is a very rare opportunity in the market and a complex topic, will cover this some other time. To start with you can just believe that the collective intelligence of the market has assigned the current trading price to a stock as a fair value and that is reasonable enough to invest into as on today. This fair value will keep shifting as more and more news flow and events happen and you have to use SIP with optimized weights based on your analysis of the news and events to maximize your gains from your investments.
Your commitment to the stock market
SIP is your best bet in the market to start with until you have enough experience and clarity in dealing with the stocks. Market is predictable only at a given point of time but future events can twist it in any direction so you have to be prepared on either side at any point of time. This is where the element of hardwork comes into market. Most people think they buy a stock and hit a jackpot and they are done. No, market requires continuous monitoring, continuous strategizing, continuous adjustments. It is a lot of work commitment and time commitment and will engage and challenge you intellectually almost to the fullest, as you juggle with the knowns and unknowns and make fine tuned decisions. Each of your decision will be punished or rewarded and you have to fine tune it further as appropriate. So it is a very involved process and requires lot of experience.
Stock market and luck
Many people think that people who make money in the market are lucky and people who don't are unlucky. Many believe that the market conspires against them when the lose money. No, Respect the market. market is superior to you. it is the collective intelligence of millions of active participant from around the world who collectively know a lot more than you do as an individual, you are just one of them. Insignificant as an individual but important as a part of the whole, learn to respect that. Always aspire to learn from the market rather than trying to teach it or manipulate it. Market is your mother when she says something you just listen to it. You don't judge it as right or wrong, just accept it and learn from it. That's the only way to prosper here, else you perish. Hard and harsh facts put in simple words for you but learnt the harshest possible way by me. Hopefully you don't go down the same path. The sooner you get it the faster you are on track to success in the stock market.
Summary
Stop chasing numbers and chart patterns, learn how the fabric of the market works, focus on the qualitative aspect of it. It is amazing and beautiful, it is full of insights and wonder. It will help you understand the world and life in general with greater clarity. It is the collective intelligence of some of the best minds in the world. Come and explore the world through the lens of the stock market. It has all the answers you are looking for if you ask the right questions :) Good luck!
Fun Chart:
BTW the complete NIFTY chart is given below, check how your prediction worked? I hope you realize by now that it could have been anything :)
No comments:
Post a Comment