“Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed." – Benjamin Graham (1894 – 1976)
Benjamin Graham, or Ben Graham as he is commonly called is one of the most prolific and celebrated investor of the recent past. He is regarded as the father of two fundamental investment disciplines – Security Analysis and Value Investing.
“A bird in the hand is better than two in the bush” – sounds familiar right ? That is the primary conception of an investor. A investor patiently waits for his turn to get into the market. He doesn’t trade all the time. Investor believes in taking a position with a long term view and almost all the time will stay only on the buying side of the market. Seasonal Trader/Investor constantly avoids the bearish phase of the market and doesn’t get into speculating. In other words, an investor prefers holding positions in the equity market rather than speculating them on the derivatives market.
Usually - retired personnel, People with high paying jobs and less time to focus on the market, those who have a huge stash of money in their accounts and craving to hold a portfolio prefer seasonal trading/investing. This kind of trading has its own advantages and disadvantages.
Advantages:
- Need not worry about daily and short term fluctuations of the market.
- Investments in heavily capitalized stocks and consistent amount of returns.
- Since most of the long term traders go for holdings of a stock, chances are high to obtain yearly dividend in case of exceptional performance of the stock held.
Disadvantages:
- Long waiting time to take up a position.
- Vast amount of research need to be done in order to invest bulk money into a portfolio.
- Positions always susceptible to various industry related conditions and performance of the companies that are held with.
- Money stagnated in the portfolio for months, sometimes for years, until desired returns are achieved.
In order to be a profitable trader in the long term, an investor must be aware of market cycles that repeat over months and years. Either he should be well equipped with the knowledge of stock markets over a 10 to 15 year period of time or should have a good investment advisor at hand to guide and manage the portfolio. Long term investing may backfire at times, given the high volatility and unpredictability of the stock markets in the near term. Nevertheless, an investor should be able to part away with his money for at least 3 to 5 years of time with out any qualms and wait for the company to bloom in order to achieve desired returns over a long period of time. All said and done, A seasonal trader/long term investor needs to believe and follow Value Investing(term never been used by him, nevertheless perfectly describes his principles of investing), according to Ben Graham.
Value Investing - Buying stocks at less than their intrinsic value. An investor needs to have an advisor who can calculate the true value of a stock in the market and find out whether the stock has appropriate “Margin of Safety”, the difference between the true value of the stock and the discount currently provided by the market. If this MOS is appropriate, say 15 to 20% of the true value, then the stock is deemed as a worthy investment.
Knowledge required by an investor to perform value investing varies from a range of topics including Government policies, Company Management’s vision, future forecasting, thorough analysis of past balance sheets, political affiliations of the company and how they interfere with the operation of the company in long term.
Some common value investing methods are to buy stocks with low PE ratio, low price to cash flow ratio, low price to book ratio. A value investing will not give the same amount of returns as that of investing in stocks with high growth forecasting. Nevertheless, the risk involved in value investing is far less than other forms of investments/speculations and provides with a sense of confidence and assurance for the investor/seasonal trader with respect to the heavy amount of money spent in building the portfolio.
The current scenario in the Indian stock market indicates that most of the stocks, if not all – are high valued and none of the big names serve the requirement of the “Margin of Safety”, a matter of concern for long term investors. Best to stay out of holding positions until the market corrects to a lower level.
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