Most
people misunderstand Long term. It does not mean that you buy and forget only
to return later after many years. Long term only means to take advantage of
compounding. Long term investing means to know the business so very well, you
have visibility to the micro and macro economics of the stock and the industry.
It means more work, more knowledge and not really a patient attitude borne out
of laziness or unwillingness. It means greater responsibility.
There are
many philosophies to investing and one needs to choose what suits his mental
makeup. Not every philosophy will work well universally as the brain
composition and wiring is different to different people. It is true that only 7
out of the original 30 stocks of 1980 Sensex are alive today. The 23 other
businesses have vanished. This is what long time does to businesses. Century
Mills form the Birla group was a market leader and darling of the stock market
in the 80s much like todays' Infosys or L&T. Who would have then thought
such a leader from an impeccable business house would vanish from the radar.
How do
you then protect your self from such changes? By closely monitoring the
business environment and the stock. By being in touch with reality and making
changes when things go wrong. The strategies that are created looking at the
past will not work for the future. Change will be the constant and the pace of
change can only get faster in the information world. The stock market is not
for people unwilling to put work. You need to protect against the risks
and that will take care of the returns. Building a portfolio of diversified
stocks is a first step. A discipline for regular monitoring and being prepared
to make changes to the portfolio is another.
A stock
as an asset has a unique value but is perceived differently by the bidders in
the stock market and hence the one who pays the most gets it. Winners curse
says that the buyer of a stock either over pays for it or the value of the
stock is lesser than anticipated by the buyer. So beware of the competitive
arousal that can do an investor in. A bull market is a preparation for the next
bear market. Invest gradually over a period of time. The market is going to be
around for a long long time although we can’t say that for the individual
businesses in it.
