Tuesday, 22 January 2013

Timing The Stock Market

One thing about stock markets which puts-off a number of beginners to stock investments, is the inability to time the markets. We give-in to buzz very easily. When a lot of activity happens in a particular scrip then it is easy for the beginner to do what others are doing and in the rush,  make mistakes. We have to practice, in-order to resist temptation and take the correct decisions. For that, we need to understand two important extremities which arise due to the market buzz.

Greed and Fear :

These two conditions affect the trader more. But, it is equally important that long term investors too should be aware of these conditions to prevent wrong decisions.

When a stock becomes famous due to its good performance, people start buying the stock in huge volumes. To a beginner to stock investments, it may seem that it is a good time to enter the market. Our greed takes over our decision making. But, this is the time to be cautious and resist temptation and keep away from buying at overbought levels (Greed buying).

Likewise, when a stock becomes infamous due to some unfavourable market conditions, there is a rush to sell the stock out of fear and there is a consequent fall in the CMP. But, a long term investor should not make his decision based on fear alone. Again, the fundamentals of the company should be an eye-opener for the long term investor. If we give-in to our fear there is a danger of selling at oversold levels (Fear selling) and not booking profits.

Beginners to stock investments should keep in mind the following two points and resist temptation at greed and fear levels :
  • The huge volume of activity created at greed and fear levels, includes  short-term traders too. So, for a long term investor like us, this sort of activity is irrelevant. Short-term traders have a different strategy altogether and will enter and exit the stock as per their technical analysis. But, if a long term investor enters the stock based on the same strategy it may be a wrong decision. We have explained the difference between trading and investing here.
  • Always the fundamentals of the company should be the core decision maker for a long term investor. Not, temporary activity in the stock market.
For a seasoned investor and a value hunter, fear should act as an opportunity to enter the stock market as a lion and the greed zone should be a trigger to exit like a king. The long investment duration will be a cushion against temporary market fluctuations and unlock the real value of the stock.

Remember that we are long term investors who invest in a stock because we believe in the company. We are not speculative traders who depend on the markets and not on the company whose stock they buy.