Strategy for Investment

So very often have I come across a query from various Long term investors asking whether this is the ultimate market bottom & from when should they start investing in such volatile markets?

This is the question to which no particular person can find an accurately reply on a consistent basis. It is better not to attempt to TIME the market for its entry or even exit. Buying & Selling should be done in a systematic manner & one must ensure that they do not resort to bulk dealings in any particular transaction during a concentrated period of time. Diversification of portfolio is yet another issue to be taken into account while investing, which we shall discuss in some other post.

Strategy for Investment:
(A) Buying in small quantity on larger Dips
(B) Selling in small quantity on larger Rise


(A) Buying in Small Quantity on larger Dips:

At the Onset of the Bear Phase:

This strategy is very useful, more so, during such markets emanating bearish patterns, wherein investor should protect themselves from the vagary of timing the markets. Often during such turbulent market conditions, investors start entering markets on a little or a small correction, witnessed from their peaks & start pouring with their funds in the markets which are still to come down substantially. They feel that, like most of the times, markets will correct marginally & again bounce back; and consequently they may lose the opportunity to invest their good money.

Staggering the flow of Funds:

In such circumstances, strategy like BUYING IN SMALL QTY ON DIPS helps investors in not attempting to time the market entry. Investors should stagger their decisions over a period of time instead of buying on a fall of every 3-5%. Continuous watching of screen is, often, the main culprit in such rather early averaging process. Instead, investors should divide their cash intended to be invested into 3-4 parts & invest them at larger dips (say, around every 15-18% for large-caps & 20-30% fall for mid-caps) at various price points, thus averaging sensibly. This strategic division of cash will ensure that the averaging is done not at small & frequent dips, but at larger fall- as the whole part of the divided cash will be used for one by one buying at different price points & time intervals.

Preserving Cash initially but Slowly Deploying it in falling Markets:

What Buying in small qty will ensure is that the investor does not run out of his cash money at a particular point of time at higher levels & that he would also be able to Average out if the money is sensibly apportioned over a period of time with different price points in strategic approach. On the contrary side, the same strategy will also ensure that the gullible investor does not have to hunt for that ultimate bottom & in the process lose out buying good stocks & right valuations. The best part of this strategy is that it does not demand huge cash reserves at any single point of time... as the buying decision is deferred over a period of time. This process is called more of an "Accumulation" rather than flat "Buying". Someone has rightly said, "Investing is an art".

Example of Implementing Strategy:

Suppose an investor Mr.X has Cash worth Rs.50,000/-. He owns 10 shares of RIL @Rs.2700/- which were bought once markets started melting down from its peaks. Later the stock stabilized at Rs.2300/- for a few months. Mr.X bought another 10 shares for averaging purpose & bring down his cost. His average of both, old & new holdings of RIL, would now work out to 20 shares @Rs.2500/-. But, later the markets came down further on global recession news & RIL came down to Rs.1800/-. However, Mr.X could do nothing but watch the falling prices of the counter & diminishing mark-to-market value of his investment in RIL, as he had already blocked all his cash by investing most of them at higher levels.

By using the strategy of 'Buying in small quantity on larger dips' as explained in this article, Mr.X would have benefited by averaging in a better manner & further bringing down his cost of acquisition in RIL on every larger dip in price, albeit with the same amount of Rs.50,000/- held by him for investment in RIL as follows:

As mentioned earlier, Mr.X originally held 10 shares of RIL @Rs.2700/- when markets started melting down from its peaks. On using the strategy of 'Buying in small quantity on larger dips', he would have further bought 3 shares @Rs.2300, 3 more shares @Rs.1800/- & last lot of 4 shares @Rs.1300/-. To sum it up, his new average would have turned out to be 20 shares @Rs.2225/-, which would be lower than his earlier average of Rs.2500/- had he not used the strategy.

Net Saving Effect:
Initial Cash Balance: Rs.50,000/-
Investment in RIL by using Strategy: 20 shares x Rs.2225= Rs.44500/-

Calculating Rs.50,000 initial cash balance - Rs.44500/- cash invested in RIL = Rs.5500/- as Cash balance which was a 'SAVING' effect of lowered average of acquisition cost in RIL, obtained by basing Buying decisions on strategy of 'Buy in Small Quantity on Larger Dips'.


(B) Selling in Small Quantity on larger Rise:

Getting light very Every Bout of Selling:

This strategy can be used at any period of market cycle, whensoever an investor is sitting on substantial profits & more so in raging bull run scenarios. SELLING ON RISE IN SMALL QTY is exactly the opposite of Buying on dips strategy but the basics remain the same - using 'strategy' while investing. This strategy involves getting light with every bout of market up move & thus minimizing risk & generating more cash in the process to get equipped with any downturn in the near future, if any.

Tackling Pre-mature Hitting of Targets:

Often in bullish market conditions, the targets set by long-term investors either get easily achieved before expected time frame or such stocks can move lot more than the targets actually set by investors, due to market mania. This strategy of Selling in small qty on rise serves this purpose very well in which the investor sells in small quantity, like selling the stock in 3-4 phases, instead of selling all the stocks at once since the set target of the investor is achieved..

Minimizing Risk with every Stock Hair-cut:

How this will benefit the investor is that- once the actual target is achieved, the investor would usually get rid of 70% of the stocks held & ride the momentum with the remaining 30%; in the process-- the investor cuts the majority of his risk by selling the larger 70% of stocks & that much cash redeemed as well. This way the investor can, if strategy is used sensibly, get on to sell the stock at much higher prices than expected and targeted & benefit by part selling. The best part of this strategy is that it not only induces u to book part gains on rise, but also raises cash for the times to come.



Summary:

BUYING IN SMALL QTY ON LARGER DIPS:
1) Never run out of cash as they are divided into various phases & invested on major declines.
2) Strategically averaging at lower levels on dips.
3) No need to time (hunt for the illusive bottom) for buying stocks.
4) Reduces the amount of speculation needed.
5) Buying decision deferred over a period of time and hence no need of funds.

SELLING IN SMALL QTY ON LARGER RISE:
1) Getting risk free with every bout of sale of stocks & still ride the momentum with remaining shares held.
2) Generating more cash with every phase of sale & get equipped for the next phase of downturn.
3) Possibility of getting more returns (yet risk free) than actual targets set on staggering selling decisions.
4) Cooler mental state, with the speculation factor reduced with systematic use of strategy.


Investors should note that these two strategies are not the only points to be considered while finalising one's decision on investments. These are just 2 of the core aspects highlighting the importance of use of strategy while making investment bets. But, what the above 2 strategies facilitates investors is that it lessens the speculative factor involved in the process of dealings as the decisions are provoked by strategic calls rather than emotive calls. It also helps investor to remain away of mental agony caused by high beta market fluctuations in turbulent market conditions. To conclude, Investing is an Art which gets refined if coupled with Scientific decisions.


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