May 5, 2009

…and you thought LONG-TERM Investment was always right!!!!

…and you thought LONG-TERM Investmentwas always right!!!!

 How long is LONG-TERM?
How long is TOO LONG?
(Some interesting facts and notes on Long-Term Investment)                          

  Megha Investments & Research.

NOTE: Throughout the article there are contents which might seem like criticizing analysts/experts etc. but it should be taken in utmost genuine faith and a criticism in fact against the ingenuine practices and vogues/fashions that have crept into the business of forecasting, reporting and stock market guiding.

Friends, in stock market majority of wise(?) and a hoard of known and unknown fund managers etc, in news papers, books, TV channels etc, here and there, every where, especially to the lay or retail investors, are seen giving their invaluable(?) advise to do LONG TERM INVESTMENTS into equities. These so-called (or self-expressive) experts keep on imparting advice of doing long-term investment at every level and every valuation of the market. Yes, correctly it can be imagined that even at 20000 index levels they encouraged and gave their invaluable (?) advice to do long-term investment. Now here, I, being a humble sport, seek to ask a question that if it was to be long-term invested in the market of 20000 index levels then what now? (what to do at present sub 10000 levels?) Now when the over all market has become half and a majority of individual stocks have declined more than half then what to do? Is the meaning of their advice of/on long-term investment is such that: one should/can do ‘long-term investment’ at any price? Then in that case the investors by becoming self-analyst would do ‘any time’, this phenomena called ‘long-term investment’, right? They are not going to need any expert, analyst or fund manager, right?

O.K, O.K., a lot of questions, huhh? But the aforementioned questions must be popping out inside every person desiring to genuinely make ‘long-term investment’. Alright, let’s try to understand it a bit systematically.

Question No. (1) Should one at all do Long-Term Investment? (2) What does ‘Long-Term’ means? What does ‘Long-Term Investment’ means? (3) How much duration (months-years) can be said to be perfectly/reasonable/rightly Long-Term? (4) Is Long-Term Investment Safe? And (5) Should it (Long-Term Investment) be done at any time (ignoring the prevalent situation whether it is a bull-run or bear-phase?

The answer no (1) Yes, definitely Long-Term Investment should be done. (2) This is one important and curiosity-evoking question. After all what is the meaning of Long-Term Investment? Friends for investment guru Warren Buffett when it comes to Long-Term it involve holding shares for a lot lot around ten years or more or even forever. But the market in which Warren Buffett operates is value, matured and developed market; whereas we operate in growth and emerging market. So the approach for investing differs although the underlying basic fundamental principles do not change substantially. Now basically, the ‘Long-Term’ Investment into equity shares are contradicted against speculative and trading activities in shares or also to negate the same and use the equities as an asset class to gain better return (interest on capital, money) and the word long-term is employed for the same. And this can be assumed literally. Then one thing: Long-Term investment means investment of money/capital into equity shares of (good) companies.
As abovementioned the definition of Long-Term Investment is different for Warren Buffett, similarly different people have defined it in various manner of which 3-4 years duration can be commoned-out, which according to Bill Gross’s Secular Trend Concept ‘long-term’ should be kept at around four years in which we also keep our belief. This concept of secular trend can be understood ahead as we progress in our discussion.  As per the secular trends minimum 2 years duration or maximum 3 to 4 years or 5 years the investment into equity shares is held to qualify it to be a Long-Term Investment or to reap the optimum or maximum fruits of a long-term investment. But at the same time it should be pre-cautioned that by saying this it does not mean at all that investment into equities should not be maintained for more than the said (3-5 years) duration. But only attempting to mean that such arrangement, such mind set should be developed so as to exit around the top of the market, and portfolio should be built in such manner only so as when the bear hammer begins in the market we do not feel left out to sell stocks at high rates and even after holding for a long term you could not be able to book profit in them or even worse—you came into loss in your portfolio! Friends, this is possible (to enter near bottom and exit near top). It may not be possible for a fund manager operating thousands of rupees value portfolio to offload all the holdings but for a small (retail) investor this strategy is possible and practicable.

So second thing clear that a duration of minimum 2 years to 4 years (Secular) should be idle duration of long-term investment in which the economy and businesses, their fundamentals get space for germination and culmination. Now more important question: Is Long-Term Investment a safe one? At first sight the question might seem absurd. But friends if this may have been so simple and straight than we wouldn’t have writing all-this on subject of Long-Term Investment. The meaning of that is only that doing Long-Term Investment at any price level and for no expectancy of definite multifold future (almost confirmed by empirical evidence) price in the market is not safe. Are the people invested in 20,000 levels safe today? Forget about safety, the kind of capital-erosion that has been taken place quickly prompt us to  distrust and lose confidence on the whole stock market and it is I guess as straight, simple and true.

I would like to dare to add another point in the middle of this discussion that when there is the situation of soaring bull-market, penny stocks going on fire, a majority of stocks’ valuations are dragged to excessive highs; at that time the possibility/probability of huge declines or crashes is very high in the markets and interestingly in fact at such times it is not desirable/safe to make ‘Long-Term Investment’ into the markets, instead do short term buy-and-trade trading. Whereas in the kind of period that we are witnessing recently where markets have tremendous correction with big crashes, and there are no possibilities of market or stocks declining further as much and as harshly as they already have. And ironically at such times earlier mentioned so-called experts/fund managers and so called star fundamental and especially technical analysts throw hasty and panicky suggestions ‘to exit’ from the market and ‘stay away from the market for now’ which is completely bull-shit, and against our Long-Term Investment Philosophy/Theory. We want to say on their face that they do not have any understanding about investing in the stock-market of else they are interested in knowingly misguiding the investors and probably have some vested interest of their or others in doing so. Friends, if there was at all anything to panic (of course there was) then it was at the 20000 levels (and not now).
[The same thing may be explained through an illustration: say, the high price of a stock XYZ LTD. is around 400 and the low price right now is around 40 or say 100, now if the company is good the stock should be purchased and not sold because the time to sell was at the top (or around) of the bull market which was probably around say 300 or 400. Moreover, at such situations the so-called star analysts of TV channels should give only buy calls rather than singing funeral chimes of ‘exit’ and ‘stop loss’. And suppose that prices declines even further, to what extent can it decline? Dear! Just look at the tremendous upside, it is offering! The supposition of prices increasing by 2 to 4 and even to 10 times, fits into our proposed ‘long-term investment theory’ which we are talking about.]

·     Entering into market at (near) bottom and exiting at (near) top should be termed and compared to what a Long-Term Investment should mean for a common investor.
·     To enter and exit at perfect bottom and top is almost next to impossible. But that is why entering at and exiting at Potential bottom and Potential top (near/around top and near/around bottom) is the sign of wise investor/analyst and should be the aim of true investor which is realistically possible, moreover which we have been able to prove it as well.
·     Sometimes it happens that markets bottom out but a lot of stocks are not yet bottomed-out meaning there by that from the bottom markets have recovered but still stocks decline or say make new lows for example recently what happened in LT, Punj Lloyd, and others.
·     No one has been able to buy at bottom and not one has been able to sell at top (take it as a general statement) or if one wants to take it more affirmatively than—If not at exact bottom then around/near the bottom purchase can be made and same way If not at exact top then near/around top selling can be done. But buy and sell for sure. Now according to our assumptions and understanding this statement regarding bottom and top is made famous because at the bottom generally not lakhs and crores of shares are traded. In the share at every price (at certain definite price) certain thousands or lakhs shares are transacted. And suppose in XYZ share a volume of ten lakhs (way too high than generally averagely transacted) shares is witnessed then even five lakh or more or all volume occur while buying-selling at bottom price is not practically possible. Even tough you might have yourself experienced or heard around saying somebody talking about him buying at exact low price or his or her stocks selling at the last highest price.
The reason we’ve stretched this point so detailed and in literal language is because the investors mentality (psychology/belief) is moulded/tied/pegged in such manner that ‘if wants to buy then buy only at lows’ and ‘if wants to sell then sell at highs only’, and that’s the reason they are not able to buy after the price have inched up or repent when the prices have declined after their buying into. Moreover after declines (after increasing) still not able to sell at profit and with greed regret to wish or expect to sell at xyz  top/high or ‘around that top/high’ which they’ve seen. Prime facie this whole matter is straight and simple but an exquisite science of investment psychology (called Behavioural Finance) and portfolio management strategies is involved in it!
·       The problem with investment in a bear market is that investors do not want (have mental/psychological anomalies regarding) see their investment value going down. They want their investment rise only and that is also the reason why retail investors tend to come down in the market when it is bullish and stay away of bear market. For e.g. when we suggested stocks to buy to our TARGETpms clients, they used to call up every day and ask that our suggested stocks are making 52-weeks every day, so they wondered what to do. And after some days back they see that the stocks are rising 20-10 % every day/week and have rose way above our recommendation price and still rising. We hope the lesson is learnt.
·       Being a bull-market investor is like not at all an investor, you don’t get to get the kind of returns that a bear market investor gets.
·       Being a bull-market investor is like not at all being “investor”. You don’t deserve to be at all said to be an “investor at all, let apart a “wise” investor.

More on Secular Trends and 500-1000% returns without an exclamation mark behind it:

Famous Bond Guru and once manager of U.S based world largest bond management company PIMCO said ‘…longer than a month, yes; longer than a year, sure; but something less than forever’, According to him ‘secular’ refers to trends that require years for their germination and culmination’)
 He also adds that he would like to think in terms of three-to-five years time spans, because that is all investors can reasonably expect to forecast. For example, instead of focusing on one-month short-term trends such as housing starts or inflation rate, investor’s should analyze the secular trends in demographics that ultimately drive the long term demand for new homes. Other secular trends include fiscal and monetary policy, trade balances, the strength or weakness of a nation’s currency, and the evolving political leanings of its citizens.
With all the respect to Mr. Bill’s view, we would like to humbly add our view that on the minimum year band we put 2 and the other end we put 4 years. We believe and have tested empirically as well as experimentally the success and proof of it. Another thing is that we believe stock markets are place to build wealth and not earn interest aloneBy that we mean that expect maximum from the stock markets, if you are talking about 15% or 25% annual return, you are making a fun of equities. We pick and invest in shares for windfall returns at least beginning with 100% and, 2 times, 3 times, 5 times and as much as 10 (1000%) to even 20  times  (don’t feel the need to put an exclamation mark behind). We mean: see what others can not see and most importantly can not believe it (or to put it rightly, are not able to believe).

At the same time Warren Buffett’s dictum is at the core of our investment strategies that: Rule no. 1. Do not lose money, and Rule no. 2. Never forget rule no.1. 
We believe in being visionary. Just like and entrepreneur visions about opportunity in a business/sector and make a richiss out of it, a stock investor visions and buy such stocks at such prices anticipating future prices which help him make as much times as much the entrepreneur himself does.

“Long-Term Investment” does not necessarily equals to “fundamental investment”. How? Check these out.

For us long-term investment equals to wealth-building activity out of putting money into equities.
     But in the markets such kind of investors’ mind-set is created and general assumption (conception) is built that ‘Long-Term Investment’ is equals to ‘fundamental investment’ or they both are one and the same thing. Then question arises that what is ‘fundamental investment’? Actually the right word is ‘Long-Term Investment’ only. But we unknowingly use the word ‘fundamental investment’ to mean ‘long-term investment’. Just think, after all what we want to do is to do ‘long-term investment (into equities)’ and at times the word ‘fundamental investment’ misguides or only signifies that we want to do ‘investment in companies that are sound, good, and whose general reputation is fine’. Now this ‘fundamental investment’ mind-set intends to ignore or say ignorantly ignores some of paramount factors apart from what it signifies about ‘good, sound and generally reputed companies’ are factors such as: 1. technical analysis, 2. behavioural finance, non-conventional fundamental analysis(beyond conventional interpretation of, financial statements and business environment)  3. micro economics, 4. macro-economics, 5. arbitrage, 6. mathematics, 7. statistics, 8. international and domestic finance, credit and liquidity, 9. international trade, 10. insider information, 11. various hedge and insurance portfolio models, 12. macro speculative approaches etc. to name most of them. We would discuss about all of them in detail and in language as much lucid as possible at some time later.
     So next time around whenever you say ‘fundamental investment, you ask yourself whether you mean ‘long-term investment’, and if yes, then correct yourself by replacing the word ‘long-term investment’. Because after all you want to do ‘long-term investment’ and ‘fundamental investment’ is just a part of it.         

Can long-term investment also be a kind of speculative, trading type of investment? Yes.
Yes friends, according to general assumption and mass understanding, only intraday trading or investing into penny stocks or taking delivery of shares for short term i.e., short term delivery based trading- is identified with trading and speculative activity in shares (speculation-opposite of long-term investment ). But in fact, investments made with an objective/view of ‘long-term investment’ can also be (or turn out to be) a speculative one kind of activity in shares! But how is that? We will understand it by throwing light at some points as under:

When the investment made with investment based (non-speculative) mindset (view), can be said to be speculative-trading type of act?
1.      To invest in ‘any’ good company, at ‘any’ price.
2.      Not to determine the duration of the individual investments according to business sector, buying price, targeted price. (say minimum two years and more can also be reckoned)
3.      Not to determine the expected return in percentage or expected TARGET (in terms of share price), is a mighty misattribute.
4.      Shares bought for short-term view but due to decline in prices converted into long-term holdings. For e.g. in reliance petroleum ltd. in the range of 200-250 similar thing has happened with a lot of people.
5.      Fine, let’s assume that the long-term investment is made with determining the expected return, target price, and duration as well; but if the stock is a penny share and/or a company without any future growth potential, then such kind of ‘so-called or so-believed’ long-term investment is also classified as a speculative trading type of activity and not a real long-term investment.      
·       Companies are never good or bad but it’s the price at which one has made investment is good or bad.
·       Investing in a very good company at a bad price would not earn any benefit and instead investing in a so-called bad company at good price can ripe returns and wealth.
                                             Just think, this is not merely a theoretical matter, but from your own experience as an investor would you find the proofs of this truth.

Honourable analyst and experts say ‘mandi jaaye aur teji aaye’, and Bull n Bear are just Cycle of market. Then what’s the Scooter or a Mo-bike…? 

‘mandi jaaye aur teji aaye’, ‘Bull n Bear is just the Cycle of the market’. Such kind of statements and explanations by reporters, analysts and persons who are supposed to be stock market guides etc. indeed misguides investors and abstain them from understanding and realizing what mistake they are making. If as an investor you have not bought at low valuation (prices) and offloaded at high, then for god’s sake what have you done in the market! And same applies to analysts and experts. All investors (in fact even non-investing humans as well) know that there in the market there is one Bull and another is Bear phase, and there is no other third thing!!
In our humble opinion they (analysts/experts) should be supposed to give answer about two things, (1) when to buy/sell?, and (2) what to buy/sell? And except these all is mere crap and distracter or ‘noise’ as we say in technical language. And this is open to all. The experts who were overwhelmingly suggesting to buy a top 5 real estate company at 500, are now pessimistic and hopeless, and giving ‘stop loss’ and ‘exit’ calls at 25, and repeat it was Long-Term ‘investing’ kind and not ‘trading’ that they were at that time suggesting.
Huh...Any way hope now you know what to do when someone say that there is these ‘bull’ n ‘bear’ cycle in the market. Ask when is it? (don’t ask about Scooter!)

Forced to do, or a mistake?...but No More. 
Everyone does long-term investment but what happens that they buy any company (or any ‘good’ company) at any price and wait n’ wait n’ wait, they surrender their capital only to give return in a bull market. They are made to bear the burnt of a declining painful bear market where for months and years what they do is only to see their portfolio value eroding with every passing day, only with the hope that the ‘mandi jaaye, teji aaye’ will save them if not today then tomorrow and that they will see their buying prices again definitely when bull market returns. For this there are few considerations that we want to put forward. (1) when will the bear market end? (2) will your company/business/sector survive the recession/slowdown? (3) will you not get panic and sell during the bear phase? (4) will the price you paid come at the beginning of the next bull market or at the top of it? (5) even you stand to lose the chance to buy at cheap levels. (6) will you not lose the return during the bear phase? (7) will you not face financial liquidity crunch?
It’s not their fault but they are forced/guided (misguided) to do so. i.e. to do Long-Term investment in bull-run, at high valuations and, hold on in bear phase, liquidate at loss, or/and not take investment position at cheap and highly discounted market in time of bear phase.

Only a more than little “waiting”
The biggest Wall-Street speculator of early twenties said “In the stock markets all my life I have learned one thing that the big money was never made in buying and selling but in waiting”.
With our TARGETpms, Just Wait For Two Years And You Will Experience The Real Fun And Fruits Of Investing In Equities.
Disclaimer:We request all the recipients to take this article as a piece of educational and research insight and enrich their understanding and provoke a thought process within their mind. The views expressed here are personal and does not necessarily mean that you should follow them. Market conditions and the dynamics of economy as well keep on changing. So we suggest taking advice of a full time professional investments and trading analyst. Although mentions relating to our TARGET-pms Service has been made at place, this article does not intend to or was not originated with intentions of promoting or advertising the said service. The support of everyone is expected.

To correlate the situational mentions with the author, please note that this piece of writing was originated around the end of the month of December 2008 and beginning of the month of January 2009.
We would endeavor to produce more of such educational piece of papers in near future, covering various subjects and aspect of stock markets, investing and trading. We would feel obliged to have comments and feedback from your side. Thank you.