Buy Stocks Like Groceries

Image Courtesy: The Consumerist

It is our natural tendency to avoid any losses and we all like prices to go up the moment we buy something.  We expect this to happen to any type of investment we make like Gold, Real Estate, and Stocks etc.  You can see this tendency every time the petrol prices are hiked by the oil companies.  If you filled up the petrol just the day before and then the price went up last night, we feel very happy that we filled it before the price went up.  While this provides short term happiness, very soon we would be filling up the gas at a higher price when it runs out.

 If one is going to be an investor who is going to invest regularly, then one should pray that the price keeps dropping when they buy so they can accumulate at a lower price instead buying at high flying prices.  We should buy into any investments including stocks the way we buy groceries.  Whenever the grocer reduces the price of the items that we buy regularly, we buy a lot of it and stock it up because we know that it is available at a great discount to the original price.  We do not show this behavior towards stocks.  Whenever the stock market goes down, we see everyone in the media with sad faces and all gurus being pessimistic about the market.  When stock markets are up everyone including the anchors are happy and smiling.  Imagine how the news would look if they say something like Titan is available at 50% discount or Nestle is going at 25% discounts to its price.  Shouldn't everyone be happy when good investments are available at a discount?  All great investors that have made big returns have all made investments when the pessimism was highest for the investment.

If you are investor with long term investment perspective, then the ideal time and the only time you should buy is when the stock market plunges down and the pessimism is high.  Stock markets tend to sometimes be irrational and throw the baby out with the bath tub.  This is the time to find really good businesses at great bargains.  When this happens buy a boat load and stock up your long term portfolio.  Be greedy when others are fearful. 

One great thing about stock market is all the time there is some stock that is out of favorite with the investors.  We will always see some stocks breaking its 52 Week lows and going down further.  One should look for these out of favorite areas and see if the concern is valid for long term.  If the concern is a short term one and the issue is only uncertainty but not permanent risk, then it makes sense to buy these stocks provided we buy it less than what it is worth.

Most of the concern comes from the fact that many of us do not know how much a company is actually worth.  If you ask five people to value a stock all five would provide different valuation for the stock.  There is no need to be so accurate in determining the stocks worth.  You do not need to weigh an obese person to call them obese, just looking at them is enough to tell.  Similarly when you see a bargain you will know it.  Key is to see what you pay (the price) to what you get (earnings).  If those returns are much above your expectation and it is likely to grow, buy it with a margin of safety and hold it either until you find another better opportunity or until the fundamentals are strong.

Some sectors that are currently out of favor are auto and capital goods.  These are the sectors that I am currently investing and picking the right stocks in this industry is very important.  Go for the ones, that have very strong balance sheet and have some kind of moat which will ensure that will be able to not only survive this down cycle but come out stronger.