I was planning to publish the post below today, but then these attacks happened in mumbai. I am extremely angry and frustated, partly due to the fact that I have lived a considerable part of my life in mumbai and still have a lot of friends in the city. I wish I could write more. My only hope is that if you belong to mumbai, you and your family members are safe.
To buy or hold ?
Almost all markets, worldwide are dropping almost on a daily basis. Just as it was a no brainer last year to buy some stock and watch it go up, the reverse is happening now. I have received comments and emails asking if the right strategy in such circumstances is to wait for the bottom ?
Most of you, who have made any purchases in the last few months, would have seen the prices drop further. A common reaction is to regret the purchase and to think that holding out would be much better. I used to be prone to this ‘hindsight’ bias too. It is very common to see ‘hindsight bias’ in both bear and bull markets. After the event, you will feel or others will tell you that it would have been good to hold out (in a bear market) or to have bought (in the bull market).
This is faulty thinking. Although Hindsight is 20/20 , you cannot invest based on hindsight. Does anyone know how the market will do in the next few days or months or a year ?
If you do then you should buying options and betting on the direction ( I have done that a few times in the past). However when investing for the long term, based on underlying business value, timing cannot be perfect. As I have said in the past, if the stock looks undervalued by a large margin, create a 20-25% position. You can later add to this position as the price changes.
I typically create a 20-25% position and then start buying more if the price drops. If the price increases, then I will just hold and do nothing. The problem with this strategy is that it works well in bear markets, but fails in bull markets. During bull markets, such opportunities are quickly discovered and the price adjusts accordingly. This strategy could save you money in bear markets, but cost you in a bull market.
I am currently looking at CRISIL closely. I have written about it in the past and will publish some analysis in a subsequent post.