"OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February." -- Mark Twain, Pudd'nheadWilson (1894)
I’ve used this quote quiet extensively in the last 10 days, whenever I’m dodged with questions on when to invest, where to invest and even whether to invest at all? With the markets touching newer heights on end of every day’s session it has been pretty tough to advise the investors to stay invested for a medium to long term horizon i.e. at least for 2 years. It was easier earlier to convince for such timeline, unfortunately investors find it difficult to hold when the markets can grow over 7% in less than a week over a base of over 16K.
Despite its inherent risks, speculation isn't altogether unhealthy. Twain's biggest mistake was simply this: Investing more than he could afford to lose. It seems like a fairly obvious concept, but it is one that constantly gets overlooked by investors. We tend to focus so much on the riches that may await us that we refuse to consider the possibility of failure. I’ve opined my clients of the risk-return profile of the instrument that one needs to look at before investing.
Exactly how much you can afford to lose varies by individual. Some advisors say no more than 10% of your portfolio value should go toward speculative investments, but depending on your risk tolerance, that number can be higher or lower. For instance, if you're getting ready to retire, throwing 30% of your portfolio at a speculative play doesn't make much sense; however, 30% may make sense to investors in their 20s who can handle the risk and who have many working years ahead of them. This is out of the conventional wisdom but I prefer not to link with the age but rather with the surplus amounts he has. I believe that the risk appetite is borne out of the cushion one has.
I’ve used this quote quiet extensively in the last 10 days, whenever I’m dodged with questions on when to invest, where to invest and even whether to invest at all? With the markets touching newer heights on end of every day’s session it has been pretty tough to advise the investors to stay invested for a medium to long term horizon i.e. at least for 2 years. It was easier earlier to convince for such timeline, unfortunately investors find it difficult to hold when the markets can grow over 7% in less than a week over a base of over 16K.
Despite its inherent risks, speculation isn't altogether unhealthy. Twain's biggest mistake was simply this: Investing more than he could afford to lose. It seems like a fairly obvious concept, but it is one that constantly gets overlooked by investors. We tend to focus so much on the riches that may await us that we refuse to consider the possibility of failure. I’ve opined my clients of the risk-return profile of the instrument that one needs to look at before investing.
Exactly how much you can afford to lose varies by individual. Some advisors say no more than 10% of your portfolio value should go toward speculative investments, but depending on your risk tolerance, that number can be higher or lower. For instance, if you're getting ready to retire, throwing 30% of your portfolio at a speculative play doesn't make much sense; however, 30% may make sense to investors in their 20s who can handle the risk and who have many working years ahead of them. This is out of the conventional wisdom but I prefer not to link with the age but rather with the surplus amounts he has. I believe that the risk appetite is borne out of the cushion one has.
Your goal in investing (besides making money) should be to enjoy it -- and not risk so much that you get discouraged by crippling losses as Twain did. That’s why I always define a goal first and then an instrument that achieves it while freezing upon the duration and the estimated (realistic) returns. It all boils down to value investing i.e. looking for growth opporutnity stocks, doing bottom-up check on each of these from fundamentals to market potential to management, etc.
So, what to look forward from here? I’ve been saying that the Sensex would touch 17500 by Diwali, in November and probably top 20K by year-end or early Jan. Now, it quiet seems possible with the US Fed rate cut and the huge influx of FII funds. But, I believe there is a correction bound to happen: could be a profit booking exercise, only to retain to these levels again. The markets however, will be range bound between 16.5K and 17K in coming weeks. This Bull Run has shown the “irrational exuberance” and 634 points of NIFTY’s 1K (63.4% in exact) being contributed by 4 stocks which are telecom, tube & pipe sectors.
Sure! There would be tougher times ahead – Twainian theory is by far very true about Ocotber month with Indian bourses which gave a highest negative return for any month cumulated in the last 17 years. So, one can’t expect such a party to continue and estimates also give cues that next year’s equity performance may lower to levels of 5-10% returns. But, hoping the global scenario at status-quo a 2 year horizon will surely yield for better returns especially the risk being petered down.
The dangers lurking under are: the rising rupee(follow this link on how the IT cos 're coping), the uncertainty in the central politics and the signs of US recession (India though is insulated to large extent, can’t quiet beat). I would end this post with another of Twain’s quotes.
"There are two times in a man's life when he should not speculate: when he can't afford it and when he can." - Mark Twain.
2 comments:
interesting.
harita.
Excellent speculation!
Well advised..
Cheers!!!!
Post a Comment