“Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.” ~ Charlie Munger
“I’m loving it!” said my friend as he entered my home for a family dinner.
“Why, did you just eat a McDonald’s burger or what?” I asked.
“What a poor joke, man!” he said while switching the channel from Star Cricket to CNBC. “Haven’t you seen how the Sensex is rising these days?”
“I don’t keep a track of the Sensex, you see!”
“It’s sad! Then you’ve missed a great rise in stock prices,” he said as if he was mocking me for not watching CNBC.
“The Sensex is up almost 20% from its December lows…all in 3 months!” he said while continuing to stare at the lady anchor who was talking something rubbish on the next few days’ forecast of the Sensex.
“You were the same guy who was cursing the stock market a few months ago, right?” I reminded him.
“Yeah…but!” he was stumped, and I felt better.
When the market rises…
You see, people hate it when stocks fall. But at times like this, when the stock market seems to be moving up in nearly a straight line (well almost), they tend to forget all the concerns that took stock prices lower in the recent past.
What is more interesting, people’s forecasts of future returns go up after the market has risen (and it goes down after it has fallen).
For sensible investors, it is important to understand that investing in a rising market is even more difficult than investing when stocks are in dumps.
So in times like these – when the Sensex has risen by almost 20% over the past 3 months and so have stocks across the board – you may find it even more challenging to make smart investing decisions.
Data Source: Ace Equity
“What should I do now?” you may ask.
Here’s my answer…
1. Keep emotions out of the picture
As in any kind of market (rising or falling), it’s important to keep emotions out of the picture when you’re thinking about how to handle a rising market.
The emotions involved during a rising market are far different from those experienced during a crash. But they can be just as destructive in taking you far away from your long-term investing plan.
Rather than making hasty moves, it’s critical that you try to do one important thing when the stock market is rising.
This is what I do when the market is rising…
I make a shopping list of stocks that I like but that don’t pass my valuation test. That way, if a correction does come – and it almost always does – then I’ll be ready to jump.
Take the case of Tata Steel and Voltas that I had studied recently as part of the StockTalk initiative and was also comfortable with their valuations then.
These stocks have moved up by 29% and 18% respectively since the days I sent you the reports.
So, if I didn’t buy these stocks then, should the 29% or 18% rise haunt me with the feeling of having lost out? And should that lead me to buy Tata Steel and Voltas now, “before it’s too late”?
No! Due to a cash crunch or some other reason, I might’ve not been able to buy these stocks when they were lower a few months earlier. But now, since I’m aware of the comfortable levels at which I should buy them when they fall, I’m saving cash to pounce on them when they really fall.
I may never get the opportunity if the stock prices do not cooperate (and they do not fall back to my comfortable levels). But if they do, I’ll be prepared, having done most of the legwork already.
2. Patience, patience, patience
Impatience is the number one enemy for any investor and patience is possibly the greatest virtue an investor can have.
As Warren Buffett once said, “Lethargy, bordering on sloth, should remain the cornerstone of an investment style.”
So whether you’re in a rising, falling, or flat market, the key to smart investing is having a plan and then having the patience to stick with it.
Like, if you know you don’t understand banking or IT companies and plan never to buy banking or IT stocks, don’t buy them just because they are rising like crazy.
Be patient with the businesses you know about, even if the stock prices there are not rising as fast.
“If we are facing in the right direction, all we have to do is keep on walking,” goes a Buddhist proverb. It captures the essence of how we can train ourselves to be patient, in life and while investing our hard-earned money.
If you know what you’ll do next (when the stock market rises or falls), you’ll have a big edge over your fellow investors – and you’ll be able to use that edge to profit where others miss out.
So be patient. Your time will come!
The final word
When euphoria or fear runs high, don’t run with it. Instead, keep a calm mind and be patient.
Avoid hasty decisions, keep playing according to your plan, and take advantage of the chaos you see all around.
Remember what a wise man once said, “Keep your head when all around you are losing theirs.”
This works pretty well in the stock market.
Now tell me – Are you investing in the current rising market? If yes, is this part of your plan?
R K Chandrashekar says
Have you noticed- generally people get more satisfaction in buying rather than selling! Also most business channels and ”experts” always give out buy lists and rarely sell lists. When to buy and when to sell is as important if not more, than what to buy and what to sell! I look forward to Safal Niveshak article in this area in the days to come.
Vishal Khandelwal says
Yes Mr. Chandrashekar, since people derive excitement in novelty, buying a stock always seems more interesting than selling a stock (and especially when one is buying a new stock). As for the experts, they earn more from ‘buy’ recommendations as it’s for a bigger audience that doesn’t own the said stock. When they ‘sell’, they can earn commissions from only those people who hold the stock.
Thanks for your suggestion for a future article!
To continue with ur Voltas example, if i keep an eye on 52 week low price of 73, I would never ever be able to buy this stock bcz it may or may not fall to that price.
The other way to look at that stock is that it is still down whopping 40% from its 52 week high of 183.
What do u think Vishal?
Vishal Khandelwal says
Hi RichFellow, if your calculations and assumptions suggest that Voltas’s intrinsic value is around Rs 100 and that you must apply a 25% margin of safety to buy the stock, waiting for it to fall to around Rs 75 makes sense.
However, I’m not sure if comparing the stock to its 52-week high holds much relevance given that that ‘high’ could’ve been due to other reasons (like a bull market phenomenon) than the company’s fundamental performance. So that 52-week high price could’ve been a ‘very expensive level’ and that the stock, now down 40%, might have just fallen to a ‘reasonable’ level.
My point is that what matters in investing is your assumption for a stock’s intrinsic value and the margin of safety you are comfortable with. Combine both these, and wait for the stock to fall to that level to buy it. If it doesn’t fall to that level, well, then look at other stocks in your shopping list.
Patience Patience Patience, still working really hard on that. Whenever I had some spare money, even like 8-10k, I used to find it really difficult to keep it in my savings account, ofcourse after the emergency fund. Because I invested them. After reading a lot about “Return of capital is more important than Return on Capital”, I have developed a lot of patience to hold on to cash. If it’s not at the intrinsic value range, I do not mind holding on to cash.
No, I am not investing at current level as sensex has gone up too fast too furious. Just waiting with my shopping list for the right time and right price.
I keep emotions out of picture by enrolling in SIP/STP in mutual funds. The pupose of my SIP/STP is to meet some definite longterm goals. So a raise of 20% in sensex in short span do not matter to me. I just see my asset allocation whenever such a is euphoria is present in the market and take my decision. Since I am investing for long term and I am buying regularly, if the market gets 20% high in a short span is infact a negative factor for me but SIP takes out all the emotions, greed and fear.
It is only in individual stocks, the issue of keeping the emotion out of picture and patience are very crucial elements and also tough elements to manage. But, it is very essential to preserve your capital and to get returns on capital. I am still maturing in handling myself in these aspects.
Your thought provoking articles are helpful in guiding me in that way.
Vishal Khandelwal says
Thanks for the feedback and inputs, Ajay!