November 22, 2016

Question: How should one go about investments now?

How should one go about investments now?  Take Asian Paints for example the sector is a bad one now but should one buy this knowing fully well there is fog on the windscreen?

Sudhin Bathija

There are 2 approaches to trading/ investing.

When trading, it is better to have a systems driven approach where you initiate a trade after certain conditions are met. For example, a simple yet highly effective rule would buy on close above last month's high with SL at month's low. Your risk per trade will be under 1% of your capital. 

In case of Asian Paints, you would have bought around 900 and exited around 1100. 

Now the next buy signal will take some time as the stock has started correctly only recently and it will at least 1-2 months for the stock to stabilise.

An interesting thing to note in above chart, the stock has given up all gains of the previous rally in a shorter/ faster time. 

For investing (i.e. really long term investing), it does not matter where you enter a stock. Of course, it is nice to say you  will look to enter after a 30% or 50% correction but then even buying at the top has been profitable. 

See following monthly chart of Asian Paint. Whether you bough at 200 or 400 or 600, the stock still doubled from that level. Of course, if you bought at 1200 then you have a problem but this you will not be able to know in advance.

We also don't know where the correction will get over ... 800, 600 or 400?

The best workaround for long term investors is then to invest max 2% of your capital in any stock. The SL will be zero which means you will exit only when you need the money or think you have some better investment option.

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