Investing long term in stocks looks like a conservative mode of managing money.
Is this a right share market investment plan statement?
Will I lose my money by investing short term on the stock market?
Do I reap the ‘real’ benefits with short-term stock or share market investments plans?
Do you have such questions running in your mind all the time and in turn, you move away from investing in the stock market? If so, you are reading a right material here.
To determine share market investment plan: short term or long term?
Have you ever watched the reality shows happen on Indian television?
Once the finalists are selected, they go public seeking votes. The artist who is popular among the public gets the most number of votes and announced as a winner, and the least becomes the loser. At times, the loser seems to be much more talented than the winner. This is how the stock market or share market investment plan works in the short term.
If you look at a person who sustains in the industry as a performer for a long time is the one who has got talent in spite of winning or losing a contest. This is how the stock or share market investment plan works in the short term. Not only the price of a stock, this short term popularity also creates an impact on the market effectiveness.
Why does Short-term Share Market Investment Plan Fail?
If you are developing your share market investment plan for short term, then the possibility of your financial success is very minimal. Do you want to know the reasons?
The biggest threat to Short Term Share market Investment Plan – Herd Mentality:
When we are investing developing a share market investment plan for short term, then our mind is focused on how to beat the crowd? So we obviously start observing what the crowd is doing with their share market investment plan and then we follow them in a haste.
Quick Tips:
- Do you invest to beat the crowd or to achieve your financial goals?
- Does your focus need to be on the strategy to be followed by the crowd in their share market investment plan or on a strategy to achieve your financial goals?
One Profit-sucking mistake every short term investor does in their share market investment plan: Emotional Decision Vs Rational Judgement
Short term mindset creates an urgency in implementing the share market investment plan. This urgency makes us decide things emotionally and not logically. When the short-term emotion hides the long-term logic, we tend to take wrong investment decisions.
Being cool and composed is very important for the right investment decisions in the stock market. Short term mindset doesn’t allow a person to be cool and composed.
Quick Tips:
- When you take a share market investment decision, are you at peace?
- Are you disturbed even after taking the decision?
- What is the logic and rationality behind taking the decision? Write down the logic.
One small hole that can sink your investment ship: Short-term Money in Stocks
In order to make quick bucks, an investor may deploy his short term money in share market investments. Share market may go down in the short term.
- Will you be able to absorb the loss?
- Will you be able to wait for some more time till the market recovers?
If your answer is no to the any of the above two questions, then your share market investment plan will not be successful.
As we are advocating strongly against investing your short term money in the share market, it is not necessary to mention that, investing borrowed money in the share market plan is also not advisable.
A deadly share market investment plan strategy: Timing the market
If you think you or your investment broker or some insider will be able to time the market correctly and can buy shares at a low price and sell at a high price in the short term, think again.
Making money in the short term in the share market by timing the market is gambling. As long as probability works in your favour, you may be making money. As probability will not be in our favour always, we will also be losing money in the stock market because of timing.
A successful share market investment plan should not depend purely on a game of chance or probability.
Warning: Stop timing the share market investments. Start increasing the time in your share market investments.
How does the short term popularity affect the share market investment plan efficiency?
Case Study 1: Reliance Power IPO
In 2008, Reliance power came with a share IPO.
- The issue prices of shares were Rs.450.
- People were anticipating because of artificially created hype, the share will re-open at Rs.900 per share when it was listed.
- With this expectation, this IPO got oversubscribed by 69 times. 69 times oversubscription was record breaking because of the over expectation.
- When the hype disappeared, popularity subsided, market realized the stock’s real worth by weighing it fairly. On the very first day of listing, these shares closed at Rs.372 which is at a loss of 17% from the issue price.
Case Study 2: Facebook
History repeats. Yes. What happened in 2008 in Indian stock market got repeated again in 2012 in NASDAQ.
Did you know the familiarity of Facebook(FB) made a chaotic situation when Mark Zuckerberg, the chairman and the CEO of FB, announced it going public in May 2012? Nasdaq was crowded by the investors wanting to invest on Facebook. Everyone wanted to put their money in Facebook stocks, there was a huge confusion occurred with opening a trading account among individual traders, agencies and other investors.
A half an hour delay occurred to begin the trading process causing a huge loss of approximately US$500 million to the banks and it took several hours to clear the situation. This particular period is now quoted as ‘it looked eternal in the whole era of high-frequency trading’. As per the latest news on Mar 26, 2013, the SEC(Securities and Exchange Commission) has approved Nasdaq to pay out US$62 million to those invested in Facebook stocks.
Are you going behind the short term popularity?
The efficiency of the market can be figured out only over a long period of time. Remember what happened in 1999 when dot.com was a word uttered by all techies and non-techies.
People were rushing to invest in the tech companies as if they were on a treasure hunt. Stock market/share market investment plan created an illusion on the minds of investors that Technology sector is going to be the only future. When the tech bubble burst stock market fell down heavily.
Many medium sized software companies which have been hyped in the market like Silverline, DSQ need to close their operations.
The hype or popularity artificially created for IT sector vanished in 2000 and investors realized the popularity was just an illusion and the stock prices of those IT stocks which have been overvalued because of popularity has come down drastically and weighed by the market fairly.
Investing for long-term: A successful Share Market Investment Plan
As a quote by Warren Buffet explains, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
What do you need to learn from Usain Bolt regarding Share Market Investment Plan?
Usain Bolt has won 9 gold medals in last 3 Olympics and he has run less than 2 mins on the track. That's economy of effort.
Usain Bolt ran for less than 115 secs in total in his 3 Olympics and made $119 million dollars! That's more than $1 million for each second he ran!
But for those 2 mins, he trained for 20+ years! *That's investment.*
Think long term with your share market investment plan. Patience Pays.
3 Things you may not know about Long-Term Share Market Investment Plan:
1. Hype Vs Value:
The value of a stock gets unlocked during unexpected times. A share price may go up or down because of some hype or rumour. But because of its inherent strength, eventually, the share price will go up. When the value of a share gets unlocked is something no one can predict.
In the Usain Bolt’s case, the value gets unlocked during the 3 Olympics. But he continued his investment for 20 years. Similarly, you need to invest for long term in order to be there with the stock during its value unlocking period.
2. Money Generated Vs Money Rotated:
In the short run, money in the stock market is getting rotated from one pocket to the other. In the long run, money gets generated.
Example 1:
In the morning, Mr. A sells shares of Infosys for a price of Rs. 970 expecting that the share price will come down in the evening to Rs.960. So that, he will make a Rs.10 profit from each share.
Mr.B buys those shares (from Mr.A) for Rs.970 in the morning with an expectation that the share price will go up in the evening to Rs.980. So that, he will make a Rs.10 profit from each share.
In this short term trading, if prices go up, Mr. B gains and Mr. A loses. If prices go down Mr.A gains and Mr. B loses.
Learnings:
- Either Buyer or Seller can make money in the short-term share market investment plan. Both cannot make money. (Broker makes money everytime J )
- Whatever the money lost by one party is the money gained by another party.
- Money is rotated from one pocket to the other pocket.
Example 2:
Mr. A buys the shares of XYZ Ltd for a price of Rs.100 in 2007. The XYZ Ltd does business with the money invested by all the shareholders including Mr.A and generates profit and the value of the company grows. The share prices move to Rs.400 in the year 2017. Now Mr.A sells those shares to Mr.B.
Mr.B waits for another 10 years and sells the share for Rs.1000.
Learnings:
- Both buyer and seller can make money in the long term share market investment plan.
- The gain is because of the economic value that got unlocked because of the long-term performance of the company.
- Money is generated as the company grows.
Before creating your customized share market investment plan, please spend time in understanding the logic and investment principles behind the above 2 examples.
3. The effect of compounding:
The power of compounding works in your favour if you are developing your share market investment plan based on long-term.
The below 2 case studies will explain, how long term investments will immensely get benefitted because of compounding.
Case study 1: Balmer Lawrie & Co
Let us take an example of a company called Balmer Lawrie & Co. This company exists in India since 1867 and LPG cylinders being used in your households are manufactured by them. They are listed in NSE as well in BSE. Do you know the compound annual growth rate(CAGR) they have achieved in the last 10 years? It is 15.4%. How many of you have invested in this company? How many of you even know this company existed?
Case Study 2: Sensex:
In the financial year, 2002-03 Sensex closed at 3048. After 10 years, in this financial year 2012-13, Sensex closed at 18835. In the last 10 years, the Sensex has grown more than 5 times at a CAGR of 19.97% p.a. If you could have invested Rs.1 lac 10 years back, it should have grown to Rs.6.18 lakhs. This is the benefit of investing for long term. How many investors who make short-term transactions have reaped these kinds of returns?.
Conclusion:
Going behind a popular stock as a short-term trader and not looking at the intrinsic value to harvest the long term benefits will make you a substandard investor.
- Which group do you want to be in?
- Do you want to increase the risk by aggressively investing in short term stocks?
- Want to be in a safe place by brilliantly planning on long term stock investments and increasing your overall return?
Take a right choice now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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