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!

Does Investing in Real Estate Make Sense?

NO!

The question is answered. How? That's what the post is all about. Just spare 4 minutes of your life's time to read a counter view on why it does not make sense to invest in real estate.

I am sure, most of the people in the world have hypnotized you by now that investment in real estate is the best investment. Especially, if you are a visitor from the eastern countries, particularly India, I can understand your emotions for real estate. Put all your emotions aside, and let logic and rationality come into the fore of your mind when it comes to money matters.

First, just ask a question to yourself, are these fans of real estate investment financially literate? Probability is that 9 out of those 10 brains you know would not be aware about what goes in he capital markets, stock markets, etc. All their brains know is cash in, cash out without any concern for time value of money.

We have been brought out to think that real estate is an asset, not a liability. It is both, let us elaborate on the difference which is more important for you. For living, you and your family would not need more than a 2BHK (bedrooms, hall and kitchen) or a 3BHK flat. Sure, that is an asset, or rather a necessity as you do not have to worry about rents and any conditions laid out by your owner. But, if you possess any more property than your necessity of living, it is all a liability.

Image Credit: Examiner.com

How? The taxes to be paid, the interest to be paid in case if it is on loan amount, it's maintenance, etc. You never know what's going on the land you bought, is it safe or not? It does not ensure you cash-in-hand. Buying property and selling off is another tiresome process which would involve real estate agents or brokers, their fees, selling it would take some time depending on the demand supply equations, real estate agent's commission once again.. Rather than this, think if you can potentially surf the internet and make yourself more financially literate!

Now, how exactly is that a liability? Our assets and liability are measured by cash value, where these definitions have come from accountancy. If you are aware, economics>finance>accountancy. Robert Kiyosaki's book, 'Rich Dad Poor Dad' offers a practical and different world-view of assets and liability than the normal. It is based on the cash flow and not cash value. Out of the 3 major financial statements that a corporation gives out every year, viz., Income Statement (also called Profit and Loss Statement), Balance Sheet and Cash Flow, Cash Flow has it's own and highest importance for the financial community. And that is why, I think, measuring assets or liability based on cash flow  is more important than anything else.

If you own a house, which is not rented, or rather no one is ready to take it on rent, you are unable to maintain which depreciates value, and you are supposed to pay property tax, water bills, electricity bills howsoever small they may sound, it is not an asset from any viewpoint. It is a liability as there is no inward cash flow involved although cash value appears high.

Moe importantly, cash is the emperor whereas profit is the king is an oft repeated statement in the world of finance. You might think that it would be profitable to sell it in the long run (with all the costs), but it would still involve time and no cash-in-hand which is more important. Putting the same amount in banks savings account, time deposits, investment plans, could have potentially turned out better with lesser hassles as you could do all this with the help of a few clicks!

If you believe in the hypothesis that real estate/property rates never fall, think again. Property rates have seen a steady downfall in UK and US! Nothing is recession proof.

Most importantly, if you believe there would be a real estate boom at some time in the future, which I am sure there would be one, a smart move would be to buy stocks of cement companies, lock manufacturing companies, paint companies, furniture companies, real estate companies, retail sector, FMCG sector, as all of it is bound to rise as real estate goes up! It would take only a few clicks to do this and you would be helping the economy of your country as well. How? The very money that you would put in shares or other financial instruments would be used by these major companies to fund their operations. They would become stronger, grow and create more job opportunities in future. On the contrary, what would a dead investment in some lone land at a far off place contribute to the economy except that agent's commission and a minuscule tax for the government?

And finally, there are hoards of people looking for buying property when not needed who are financially not literate. Leave it for them, they would keep buying! I have always wondered why those of my friends and acquaintances investing in shares have had a blind eye towards real estate... A few reasons were listed, a few would be written later in coming blog posts, so stay subscribed or keep visiting!