FinPocket

Market achi lagti hai? – Do you trade the market or stocks?

Written by: InvestKaar

The most common discussion between a broker and an investor is to discuss the market? But should you?

We don’t think so!

Let’s see why?

Open up any Facebook/WhatsApp group that relates to stock investing and you will find people giving you the famous “market ka dihaan” (translate: market views). This is the most common topic of discussion and if you are an active trader, we are sure that’s how your broker starts his morning call.

This fixation is real and we all have fallen prey to such one-track thinking. But should one think like that? Follow the market instead of stocks?

Absolutely not!

The key here is to know yourself! Define who you are? Are you a trader? Then go for it. But if you define yourself as an investor, the only worthwhile exercise for you is finding undervalued stocks with an underlying growth story.

Continue reading if you are an investor!

We don’t need data to prove that trying to predict market behavior on a daily basis is not only senseless but extremely tricky. I mean if that had been the right way, why would we need fund managers or investment specialists like Mr. Buffet, George Soros, or Carl Icahn – people that research stocks and companies, not index levels.   

Let’s hope to clarify this via the following examples:

KSE100 Index was trading at ~47,000 in April 2018, touched a low of 28,500, and then reverted back to almost the same levels of ~47,000 today. So, if you were a passive investor, your return would have been ZERO.  

For a clearer picture, we constructed a chart showing the KSE100 index’s performance against some select out/underperformers since 2018:

What you see above is that while the index (red line) has remained flat, individual stocks had a different story to present. And Blue-chip or large market cap stocks underperformed while small-cap stocks outperformed.

Please don’t think that we are recommending you to start buying small-cap stocks.

No, that is not our intention.

The reason behind all this work was to make our readers understand that finding good stories is always much better than focusing entirely on the index movements. Predicting market movements is very tricky and depends on a host of factors – some can be forecasted, many not.

  • At 15% discount rate, this company will have to pay Rs75/sh as interest alone. This leaves only Rs25/sh for shareholders. For comparison, company A had Rs100/sh for shareholders.
  • Now say the discount rates come down to 7%, they now have to pay only Rs35 as interest – its halved. But see how much money is now left for shareholders – Rs65/sh as compared to Rs25 when DR was high.
  • Take a moment to comprehend the difference. This is 2.6 times more for shareholders vs when the discount rates were high.
  • So, all in all, more money means more valued the stock is and this is the prime reason why penny stocks rally when discount rates come down.

So why spend your precious time glued to the screen, fretting over the ever-constant up and down of the market?

One can argue that finding companies that are cheap and of good quality (low earnings volatility, high margins) isn’t easy either. We agree! That’s why we came up with a broad checklist that will help you with the preliminary analysis:

  1. Follow a few stocks instead of the broader index
  2. Make a list of stocks that you feel you know more about
  3. Read research reports on them (if available otherwise skip to the next step)
  4. Follow financials (focus on: profits, sales, margins) and read director reports
  5. Talk to your broker, not about where do they think the index is going, but about stocks you are interested in
  6. Then add them at the right opportunity

This may seem tedious and you may feel that you will go wrong initially. But trust us, it gets better when you do it over and over again. In fact, after a while, you will get familiar with the companies and even learn their trading patterns.

Always remember, investing isn’t a science, it’s an art!

We feel best buying opportunities present themselves when the overall mood of the market is negative and it’s falling. And if you have a list made at that time with some preliminary analysis done, every bearish spell in the market will become an opportunity!

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