Strategy for Shares and Stocks Investment

To any regular trader, a question often comes up in mind, ‘how to invest?’ Please do not confuse it with the novice asking this same question.  I am talking of all those people who are regular traders/investors, the question that actually troubles them is, ‘how to invest to maximize gains?’

That’s what I am talking about. As much as risk and return are supposed to go hand in hand (though I personally do not believe much in this adage), it is time and money that start showing a negative correlation at times. Let me illustrate this with an example.

Paresh buys Hindustan Unilever stock sometime in 2009 for Rs. 270. Paresh’s thought at the time buying is to go for a stock which will give maximum returns. He even sees the stock rising in price. One fine day after a month, it reaches 320 Rs. He earns an 18% absolute return within 1 month, which would mean 18*12. i.e. 216% hypothetically. But, still he keeps his hopes high and waits for the stock to rise up. Speculating that the share price would go up further, he waits and watches. He finally sells it for Rs. 370 sometime in 2011. He is against short term trading and believes in sticking to one company’s stock for a long time. He gets a return of 37% in 2 years which comes to 18.5%per annum. Compare 18.5% to 216%!!

The effect of compounding has been neglected in both the cases.

Now, what was better? If you sell in short time, there is uncertainty that the stock might do good in future. If you trade short term with profits of 1% or 3% over a 2/3 days or weeks’ time, the effort required is high. Also, to continually trade in different stocks, one has to understand that one needs to research a lot beforehand. How much time can you put in searching for better companies or scrips, especially if you are someone can’t devote time to this in office timings?

Now, consider another scenario like that of Paresh. He was lucky enough to get a good company but what if it did not go beyond a certain point? How long can one hold a stock? There is opportunity cost involved here, i.e. the money could have been invested in some other stock yielding a better return. There needs to be some time constraint. It doesn’t make sense to stick to one stock for such a long time especially when it refuses to move.

This time vs money battle confuses Paresh and he wants an optimum way out. Also, his job does not allow him enough free time to research new stocks and trading every day.  So, he has to invest in only a good company after researching in minimum time possible.

There is one single simple thing that would work for him or anyone else.

Set a short term target and sell it quickly.

Yes, that is what works. By short term target, I mean a defined return percentage or share value. For most people who are not daily investors, getting a return higher than inflation or a fixed deposit does the job. So, consider you decide to earn a per annum return of minimum 25%. In reality, it might seem difficult to many but by buying and selling fast, one can easily achieve this.

Buy a share of your choice (irrespective of what others say), say share of company X and sell it the moment of it gives a 6% to 8% return. No looking beyond that. 6 months down the line, you might see it would have given a 20% return, but no point regretting this. As you sell this, buy another with company Y and sell it with a return of 6 to 8% immediately. Just 4 such deals a year and you have a earned a minimum 24% return!!

Believe me, you will get more than 4 deals like these throughout a year. It looks all complicated but by not speculating and being content with seemingly smaller returns, one can easily earn decent amount despite playing it safe.

It is important to understand the upward or downward rally which could give high returns in less time. Do not ever underestimate time. 

A stock that has gone up by 4% today is very likely to go up tomorrow. It slowly reaches an almost stable level of say, only 1% up and then starts falling down. It is important to understand this generally found empirical observations which help in getting maximum returns!

Best of luck with your investing!