Investing long term in stocks looks like a conservative mode of managing money. Is this a right statement? Will I lose my money by investing short term on the stock market? Do I reap the ‘real’ benefits with short term stock investments? Do you have such questions running in your mind all the time and in turn you move away from investing in the stock market? If so, you are reading a right material here.
How to determine whether to invest long term or short term?
Have you ever watched the reality shows happen on Indian television? Once the finalists are selected, they go public seeking votes. The artist who is popular among the public gets the most number of votes and announced as a winner, and the least becomes the loser. At times, the loser seems to be much more talented than the winner. This is how the stock market works in the short term. If you look at a person who sustains in the industry as a performer for a long time is the one who has got talent in spite of winning or losing a contest. This is how the stock market works in the short term. Not only the price of a stock, this short term popularity also creates an impact on the market effectiveness.
How the short term popularity does affect the market efficiency?
In 2008, Reliance power came with a share IPO. The issue prices of shares were Rs.450. People were anticipating because of artificially created hype, the share will re-open at Rs.900 per share when it was listed. With this expectation, this IPO got oversubscribed by 69 times. 69 times oversubscription was record breaking because of the over expectation. When the hype disappeared, popularity subsided, market realized the stock’s real worth by weighing it fairly. On the very first day of listing, these shares closed at Rs.372 which is at a loss of 17% from the issue price.
History repeats. Yes. What happened in 2008 in Indian stock market got repeated again in 2012 in NASDAQ.
Did you know the familiarity of Facebook(FB) made a chaotic situation when Mark Zuckerberg, the chairman and the CEO of FB, announced it going public in May, 2012? Nasdaq was crowded by the investors wanting to invest on Facebook. Everyone wanted to put their money on Facebook stocks, there was a huge confusion occurred with opening a trading account among individual traders, agencies and other investors. An half an hour delay occurred to begin the trading process causing a huge loss of approximately US$500 million to the banks and it took several hours to clear the situation. This particular period is now quoted as ‘it looked eternal in the whole era of high frequency trading’. As per the latest news on Mar 26, 2013, the SEC(Securities and Exchange Commission) has approved Nasdaq to pay out US$62 million to those invested on Facebook stocks.
Are you going behind the short term popularity?
The efficiency of the market can be figured out only over a long period of time. Remember what happened in 1999 when dot.com was a word uttered by all techies and non-techies. People were rushing to invest on the tech companies as if they were on a treasure hunt. Stock market created an illusion on the minds of investors that Technology sector is going to be the only future. When tech bubble burst stock market fell down heavily. Many medium sized software companies which have been hyped in the market like silverline, DSQ need to close their operations.
The hype or popularity artificially created for IT sector vanished in 2000 and investors realized the popularity was just an illusion and the stock prices of those IT stocks which have been over valued because of popularity has come down drastically and weighed by the market fairly.
Investing for long-term:
As a quote by Warren Buffet explains, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
Let us take an example of a company called Balmer Lawrie & Co. This company exists in India since 1867 and LPG cylinders being used in your households are manufactured by them. They are listed in NSE as well in BSE. Do you know the compound annual growth rate(CAGR) they have achieved in the last 10 years? It is 15.4%. How many of you have invested in this company? How many of you even know this company existed?
In the financial year 2002-03 sensex closed at 3048. After 10 years, in this financial year 2012-13, sensex closed at 18835. In the last 10 years, the sensex has grown more than 5 times with a CAGR of 19.97% p.a. If you could have invested Rs.1 lac 10 years back, it should have grown to Rs.6.18 lakhs. This is the benefit of investing for long term. How many investors who make short term transactions have reaped these kinds of returns?
Going behind a popular stock as a short term trader and not looking at the intrinsic value to harvest the long term benefits will make you a substandard investor. Which group do you want to be in? Do you want to increase the risk by aggressively investing on short term stocks? Want to be in a safe place by brilliantly planning on long term stock investments and increasing your overall return? Take a right choice now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
How to determine whether to invest long term or short term?
Have you ever watched the reality shows happen on Indian television? Once the finalists are selected, they go public seeking votes. The artist who is popular among the public gets the most number of votes and announced as a winner, and the least becomes the loser. At times, the loser seems to be much more talented than the winner. This is how the stock market works in the short term. If you look at a person who sustains in the industry as a performer for a long time is the one who has got talent in spite of winning or losing a contest. This is how the stock market works in the short term. Not only the price of a stock, this short term popularity also creates an impact on the market effectiveness.
How the short term popularity does affect the market efficiency?
In 2008, Reliance power came with a share IPO. The issue prices of shares were Rs.450. People were anticipating because of artificially created hype, the share will re-open at Rs.900 per share when it was listed. With this expectation, this IPO got oversubscribed by 69 times. 69 times oversubscription was record breaking because of the over expectation. When the hype disappeared, popularity subsided, market realized the stock’s real worth by weighing it fairly. On the very first day of listing, these shares closed at Rs.372 which is at a loss of 17% from the issue price.
History repeats. Yes. What happened in 2008 in Indian stock market got repeated again in 2012 in NASDAQ.
Did you know the familiarity of Facebook(FB) made a chaotic situation when Mark Zuckerberg, the chairman and the CEO of FB, announced it going public in May, 2012? Nasdaq was crowded by the investors wanting to invest on Facebook. Everyone wanted to put their money on Facebook stocks, there was a huge confusion occurred with opening a trading account among individual traders, agencies and other investors. An half an hour delay occurred to begin the trading process causing a huge loss of approximately US$500 million to the banks and it took several hours to clear the situation. This particular period is now quoted as ‘it looked eternal in the whole era of high frequency trading’. As per the latest news on Mar 26, 2013, the SEC(Securities and Exchange Commission) has approved Nasdaq to pay out US$62 million to those invested on Facebook stocks.
Are you going behind the short term popularity?
The efficiency of the market can be figured out only over a long period of time. Remember what happened in 1999 when dot.com was a word uttered by all techies and non-techies. People were rushing to invest on the tech companies as if they were on a treasure hunt. Stock market created an illusion on the minds of investors that Technology sector is going to be the only future. When tech bubble burst stock market fell down heavily. Many medium sized software companies which have been hyped in the market like silverline, DSQ need to close their operations.
The hype or popularity artificially created for IT sector vanished in 2000 and investors realized the popularity was just an illusion and the stock prices of those IT stocks which have been over valued because of popularity has come down drastically and weighed by the market fairly.
Investing for long-term:
As a quote by Warren Buffet explains, “In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
Let us take an example of a company called Balmer Lawrie & Co. This company exists in India since 1867 and LPG cylinders being used in your households are manufactured by them. They are listed in NSE as well in BSE. Do you know the compound annual growth rate(CAGR) they have achieved in the last 10 years? It is 15.4%. How many of you have invested in this company? How many of you even know this company existed?
In the financial year 2002-03 sensex closed at 3048. After 10 years, in this financial year 2012-13, sensex closed at 18835. In the last 10 years, the sensex has grown more than 5 times with a CAGR of 19.97% p.a. If you could have invested Rs.1 lac 10 years back, it should have grown to Rs.6.18 lakhs. This is the benefit of investing for long term. How many investors who make short term transactions have reaped these kinds of returns?
Going behind a popular stock as a short term trader and not looking at the intrinsic value to harvest the long term benefits will make you a substandard investor. Which group do you want to be in? Do you want to increase the risk by aggressively investing on short term stocks? Want to be in a safe place by brilliantly planning on long term stock investments and increasing your overall return? Take a right choice now.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
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