The right price to buy

Every morning scores of analysts are paraded on the silver screen and asked a question. “Is it right time to buy?”.

I’m not planning to indulge in my favorite task of analyst bashing, I’m questioning the questioner. Inherent in the question, is an assumption that it is possible to time your entries and exits from the markets when the wisdom of most successful investors of this century suggests otherwise. When you are buying a consumption item, say a shirt and you see a sale where you are getting a really good shirt at throw away price, would you instead wait for the festive season to come, hoping that prices will go down further? For sure, buying shirts is not same as buying stocks but I hope you get the point I’m making here.

Since I became value investor, I have always ignored the timing aspect. I’ve always asked myself “Is it the right price to buy?”. You can amaze yourself with your innate ability to learn if you focus your mind on right questions. To a novice in quantum physics the question “What was there before Big Bang(or before God, for religiously inclined people) excites very much but the people who are well versed with modern physics know that this question itself is wrong.

To give you an example, in January when Sensex fell from 20,728 to 16,729 within a week, I found an excellent opportunity staring at me to buy Castrol at 235 Rs. I was of the view that the market is going to go much much lower than this. Had I asked myself if this is right time to buy, I would have been hesitant to buy. But I focused on the question whether it is right price to buy. Castrol, with its brands and strong leadership position in Indian markets has been my all time favorite. Its virtual monopoly ensures it a RONW of 50% and it was available at P/E of 13.3. The company had paid Rs 9 as dividend for last year which I expected to grow this year. Moreover the book closure date was in April which meant I will get dividend in 3 months. I bought the stock at 235.

The company paid Rs 14 as dividend giving almost 6% dividend yield, net profit rose 75% and 26% in next two quarters. The markets meanwhile crashed and Sensex lost one fourth of its value. On September 29th, I sold the stock at 332 because I needed cash for many other lucrative opportunities available now. Nonetheless, it gave me 47% gain(including dividend) against 25% loss in Sensex.

I’m not boasting my lucky strike but trying to demonstrate the value of right thinking in value investing. The same line of thinking has kept me out of harm’s way by making me sell out a huge chunk of my portfolio last year when to most people, it seemed like once-in-a-lifetime opportunity to make quick buck.

You should accept the fact that you can never time your entries and exits. At the peaks and bottoms the markets behave like senseless maniac who knows no reason. No price is too high and no price is too low. It gets irrational. Do you think Warren Buffett is lying when he said “I have no idea what the stock market is going to do next month or six months from now” or do you think “Oh! I can of course do better than the old man who is past his prime”.

If you buy the stocks which give you outstanding value for the money invested in them, you are bound to do well. I will just repeat what Warren Buffet said last week to CNBC, "You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well."

And yes, Indian economy is going do quite well in next decade notwithstanding the low IIP figures, high inflation, falling ruppe and slowing global growth.

Sky isn’t falling.

1 comments:

kasi said...

excellent

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