Reader’s Question in Ask Me Anything
I only invest in Nifty and Sensex companies and buy when everyone is selling and sell when everyone is buying. When the share price goes down by 5% I buy and exit at profit of 20% to my average buy price. I am not seeing any profit in my portfolio and so can you tell me what the hell am I doing wrong.
I had a couple of questions from readers asking about similar strategy that they follow and what is wrong in the above strategy as they are not able to make a profit out of it.
Apparently it may look like it is quite right kind of strategy to make money from market but in reality the strategy is completely wrong.
Let me share with you what is wrong with the above strategy.
1. Misinterpreting Warren Buffet
The first mistake is misinterpretation of Warren Buffet actually meant. His actual quote is “Be fearful when others are greedy and greedy when others are fearful” which has been translated to “Buy when everyone is selling and sell when everyone else is buying”.
Warren Buffet’s advice was to buy when everyone is selling for sure but if you look at his portfolio for last 6 decades or so. He is holding those stocks for decades and never sold when everyone was buying.
He never had any strategy to exit, but then if you ever want to, it should be when everyone is greedy and buying in the market.
So he did not say when to buy and when to sell but what he meant is when you should be looking to buy and when you should be looking to sell if you want to.
2. Only Reading Quotes
If you are following Warren Buffet, you should not follow his few quotes that you read on social media but follow his complete journey to invest, how he values business and when he invested in them and why. Read all you can about him in books and news. I am yet to read about anything major that he has sold in the market (I could be wrong but that is what I have made reading about him for almost a year now).
I was more of a trader but as my amount increased, I wanted to start investing and build my portfolio. I began to read about him and started to follow his news and also his critics. You can see that I shared my review about The Warren Buffet Book in December 2014. After reading everything I can about his way of investing for almost a year, I started building my portfolio.
I still follow what he is doing. Recently he has been buying IBM. His companies last fiscal report suggested he has purchased IBM at an average price of 178. There has been more news where he has added more position into IBM. Current price of IBM is 125ish. He is buying in dips and buying over a period of time and if he is right in assessing the business (which he is everytime), IBM will be in his portfolio for the next few decades.
So if you are following Warren Buffet’s principle just don’t read quotes on social media to make your strategy. It is not so simple.
3. Buying at the wrong time / price
The strategy to buy when everyone is selling and sell when everyone is buying is really good but then it is not about buying when everyone has started selling and sells when everyone has started buying.
You should not be buying when everyone has started selling. 5% reduced in price in market may not mean everyone has started selling but it can just mean market aberrations but what he meant by saying buy when everyone is selling is buy when stock becomes really cheap and no one wants to be buying that stock out of fear of becoming cheaper and you have assessed your investment.
I will read “Buy when everyone is selling” as buy when no one else is buying or rather it is at a price which is cheap and provide value. Stock trading at 30 times its earnings and now at 27 times (assuming a 10% cut) does not mean it is cheap or provide value.
So it is about buying the stock at the right time and not just when randomly corrects by 5%.
4. Selecting the wrong stock
Warren Buffet never focused on investing in index stocks. So if you apply of what he said on index stocks, it may not work for you.
First understand that Sensex and Nifty are representation of all sectors performance for India and does not mean they are the best stock in the business but what they certainly mean is they are the largest capitalization which means they represent large chunk of the market segment because of their size and not because of their profitability.
The second mistake is selecting only Nifty or Sensex based stocks and if you want to be doing only Nifty and Sensex based stocks, why not go with index funds instead.
I can understand why anyone would opt for index stocks and I don’t blame you but the strategy that you are following may have worked very well for you if you had opted to buy index based mutual fund instead of stock.
Choose an averagely good performing index mutual fund and invest in the fund when the market falls by 5% and sell part of your investment when you are profitable by 20%.
Stocks with such a strategy can be too risky as there is no study involved in selecting your stock. Stocks as good as L&T has been falling from 1800 to 1200 and there are consensus of it going under 1000 as well but then if you just buy on every dips, you may be making loss for next 3 to 5 years when the stock may just consolidate and make to the point of your buying average price which may be around 1500.
I can offer you many such examples like Punj Lloyd, Reliance Industries, Bharti Airtel which are Nifty / Sensex stocks but has not done much in the last decade or so.
Investing only in Nifty / Sensex stocks is not enough. Either do your own research about business or let mutual funds decide which stocks to own among Nifty / Sensex.
5. Compounding losses and booking small profits
One stock that goes higher, and if it makes a profit of 20% for you, you are out of it but the one that have made a loss of 20%, you own 4 times you initially owned.
Market is not all about mathematical formulae. 5% down and I add, 20% up and I sell. You have made a strategy that is neither dependent on the current market scenario nor you are doing things to change your strategy from time to time.
So you should not be focusing on doing predetermined things. Let the market tell you what you should be doing.
If you look at the portfolio I am building for my blog readers, you can see that Zydus Wellness has corrected almost 20% from my first purchase and I am yet to look at investing my second tranche into it and don’t have plans in Feb either and don’t see it happening in March either. I would let it settle down and then possibly re-evaluate. Don’t predetermine things.