Greed and Patience are Good for Investors(…Time to forget your moral lessons)
In a previous couple of posts, we had discussed how to obtain a Demat/ Trading account, simple steps to choose businesses for investment, deciding the fair price for buying shares, and finally, how to take that big step of converting our investment idea into a reality on an e-platform provided by our broker such as ICICI Direct, Kotak Securities Zerodha, etc. I am sure many of you would have taken your first step in the financial wonderland, and many would follow soon. It doesn’t matter whether, investment is big or small, always remember, the experience you would gain would be priceless for your future journey on this path. Therefore, as promised, in this post we will discuss what should be our profit booking strategy.
An investor, in my eyes, is nothing but a farmer, it sows seeds of money and wants it to grow. Therefore, like a smart farmer, I would like to sow multiple financial crops maturing at different times, maximizing my utilisation of resources. Consider Blue Chip Stocks as tall fruit-bearing trees, these would give stability to your portfolio and will provide periodic gains in terms of dividends. The value of these stocks generally increases with time. Then comes the Mid Cap Stocks, these are like shrubs, high risk — high gain stocks and hence would need regular monitoring and pruning. These may grow exponentially if conditions are right but may wilt down also that easily. Accordingly, these are to be handled skillfully. Lastly, there are some stocks like weed or grass on the farm, if we can identify some of the useful ones, these may provide returns in a very short time, but these cannot be kept for a longer duration as these can’t withstand the change of seasons and conditions. We may experiment with some of these in small patches but never ever allow these to spread throughout the farm and bring the overall yield down.
Continuing the same example of farming from investing point of view, when do we cut fruit-bearing trees? Never, isn’t it? At least not till they are providing fruits and they are healthy. The same is true for Blue Chip Stocks. In fact, if you have resources, you may consider sowing more and more such trees as they will serve you and would also provide fruits to the next generation, one such example may be MRF. Mid Cap Stocks are like a seasonal crop of the farm, they need to be monitored closely and need to be harvested at regular intervals so as to ensure seed capital doesn’t dry up. After a certain point, these stocks would tumble down before they commence their journey upward once again. Therefore, these need to be harvested when they are at their season-high. The last category of stocks, I would like to think them as ornamental weed, they may not have any inherent value, but once in a while, they may become fashionable, and suddenly there may be a rush for them. Therefore, limit your exposure to such penny stocks, however, you may invest a fraction of your portfolio in such stocks for learning and for cashing in the fashion trend. One rain or change of a couple of degrees in temp makes such weed vanish. The same is also true for such stocks, one adverse news, and these stocks tumble down to levels from where they started. Guys! please be smart and always remember market reacts to speculations and often crashes with confirmation/ news. For any reason, if you must invest in such stocks, make sure to use only spare money and never more than 1% — 2% of your total investment value.
For Mid Cap and Penny Stocks, the best strategy would be to decide the target price for booking profit at the time of investing itself. In previous posts, we have seen how to draw the inflection point lines joining hills and valleys. I am sure we all will like to invest closer to a line joining valleys, and hence, our target price for booking profit may be the line joining the hills. Simple isn’t it. But please remember that the price graph many times reverses its trend just short of inflection points line and therefore, I would recommend that we must keep a margin of at least 1% from the target price. This style of periodic investing at low and selling at high is often referred to as Swing Trading. Penny Stocks may or may not follow inflection points lines, and hence to optimize our returns in these, we must use Stop Loss and Trailing Stop Loss functions provided by brokering sites. This, too, we will discuss once we are on to Technical Analysis.
No matter how accurate is your assessment, price movement is also dependent on external factors such as Governmental Policies of importing/ exporting countries, natural disasters, and speculative bidding. Therefore, if a particular stock is not performing as per our expectations, what should we do? How long should we hold it? If the price of this stock keeps going down, should we buy more of it, or should we cut our losses? These are very basic but important questions, for which we should be prepared in advance. Hence in the next blog post, we will discuss these in detail. Till then, happy learning and happy investing. Guys, I must acknowledge, in my ongoing quest to attain financial independence, a lot of people have helped me in understanding this wonderland. The only way I may repay their debt is by spreading this knowledge to as many people as possible. Therefore, I seek support from all of you, especially my generation, to reach out to your friends and family and share the blog posts. Like always, let me also remind you to like the post and hit the Follow button on the top left, if you have not already done that.
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Greed and Patience are Good for Investors(..Time to forget your moral lessons) was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
