How to invest in stocks, market is so high? Don’t worry, we have evergreen investment strategy for you!!

 

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Sensex & Nifty50 are creating new highs every week & currently exploring uncharted territory. An usual question that often comes to us from investors is how to invest in such a high market? Should we invest more, stop investment or sit on cash? In theory, we should not try to time the market since nobody knows which way market will go from here, it may continue to go up for quite sometime or may fall back when it is least expected. In this article, we will try to find a middle path which can be followed irrespective of market conditions. We recommend same approach while investing with any stock advisory service like Tiny CAPS as well.

If someone is telling you that market is overvalued & it will fall, or market is still undervalued & it will rise, both of them are telling lies. Simply because no one can predict market’s next move. While at present, many people believe that market will see some sort of correction before resuming uptrend, they are also not correct. The very basic reason why such predictions are prevalent is because of our human nature which loves speculation. Let’s suppose a stock is priced at ₹100 which you find overvalued and did not buy since you were waiting for better entry points around ₹70.

There can be three possible scenarios:

  1. Stock price falls to ₹80 (-20%) and then jumps up again to ₹140. You believed that it will touch ₹70 which it never did and missed this opportunity. Due to our biased nature, you are not likely to buy this stock at ₹140 since you rejected it around ₹100. One good stock is gone forever.
  2. Stock price falls to ₹70 (-30%) and you purchased in bulk. Stock price falls further to ₹60, then ₹50 and you are sitting at big loss.
  3. Stock price falls to ₹70 (-30%), you purchased in bulk & then stock move up to ₹140. You made a killer deal and sitting with good profit.

I know all of us are thinking that I belong to the third category but ask yourself, is it possible to be remain lucky all the time? Is this a strategy which can be followed over long period of time & irrespective of market conditions? Is this going to make your life easier or tougher? Above all, your chances of success are only 33% while loosing is 66%. This is worse than investing over flip of a coin (here chances of winning are at least 50%). It’s a big risk that you are taking where odds of loosing are more than odds of winning. If you repeat it over long period of time, law of average will catch up & that one extra odd of loosing will be apparent in your portfolio returns. Think about it!

So what to do then? According to AI, the best possible way to enter a small cap stock is in phases. You can divide your total investment amount into 4 or 5 pieces and then you can invest each piece only when stock proves its worth. You can invest next piece when stock runs up 50% more and followed by next piece once it crosses another 50% and so on. This will not only ensure you are increasing exposure on the winning bet but also restrict your capital loss in case it does not work out. Most importantly, you are not going to loose your sleep and this can be followed irrespective of market direction.

Index constitutes of only 30 or 50 stocks, if you are a small cap investor, you should not be looking at index all the time since the stock you are investing is not there in index. So what is the point of looking at index and taking it as a reference for small cap investment decisions? Is it similar to checking Bangalore weather for taking umbrella in Delhi. True that there will be a panic reaction and if market falls, all stocks will tumble but the one which is fundamentally superior, will emerge soon after the storm is gone. So it is far more important to know what your stock is doing rather than what index is doing.

Another alternative investment style often followed by small cap investors is to invest full amount in one go. The logic is to get maximum bang out of the future potential. This approach can be good if you have lump sum money which you plan to invest for long term in a portfolio based service like MultiCAP Multibagger, which restricts itself to a limited number of stocks only. However, if you are planning to invest each month in a Tiny CAPS service (which gives new stock each month) from your salary, then it is not the best approach. The reason why it is not the best approach is because it will expose you to each stock in equal proportions and also spread your money into a large number of stocks over a period of time (consider how many stock you will own in 3 years time). This will lead into a classical case where some of your investments will work while others will not, leaving overall portfolio return as average (read our earlier post on same topic).

To conclude, for getting risk adjusted superior returns, investors must invest in a phased manner unless they are going for a portfolio based service which is entirely a different scenario.

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