When do you think is the best time for investing in stocks? I will give you two scenarios:
- Scenario #1 – Markets have already appreciated a lot, the valuations are on the higher side, investors and advisors are trumpeting about their gains and past performances, bubbling stock forums, WhatsApp groups, too many IPOs and QIPs happening, good news all around, equity turnover data on the higher side, etc, or
- Scenario #2 – Stocks are substantially down, valuations on the reasonable side, no one discussing recent performance, drought in IPO and QIP space, no more pesky SMSs, bad news all around, reasonably quiet stock forums, WhatsApp groups, etc
In our view, a herd follower almost always chooses Scenario #1 and unfortunately never makes much money from the stock market (unless one has a clear-cut momentum based or trend following strategy).
While a smart investor who can think in terms of cycles, discounts, contrarian investing relishes the opportunity of investing during Scenario #2.
The question then arises, why is it so difficult to investing during Scenario #2 when it’s a common sense fact that buying low and selling high is what makes money in the long run.
Well, it’s not always easy to apply common sense, especially when the matters of money are involved and psychological factors start taking precedence.
Also, for an investor investing during Scenario #1, there’s immediate gratification in the form of quick money, though long term losses. While someone investing during Scenario #2 doesn’t immediately sees gains in his portfolio but ends up doing really well over 3-4 years of patient investing and disciplined portfolio build up.
Now, coming back to the moot question…Is this the best time for investing in stocks?
Well, we see the current period as Scenario #2 because except for the top 20-30 stocks, the valuations in general have become reasonable (in fact really low in certain small and mid-cap spaces), IPOs and QIPs are definitely not happening, the discussions on next multibagger stock have stopped, investor confidence and participation is low (as evident from reduction in equity turnover data), pesky SMSs have reduced considerably, etc.
We therefore believe, unless one has lost faith in India’s growth story and entrepreneurial ability, it is indeed a very good time for investing in stocks or making corrections in one’s portfolio.