Are you one of the investors who is getting sleepless nights because of falling market? If yes, you have to review your investment philosophy, like immediately. The reason why investors like Rakesh Jhunjhunwala and Warren Buffett look forward to the market corrections is that it gives them an opportunity to buy quality stocks at discount. Expert investors often say - to get value out of your equity investment it is important to think beyond the investment horizon of a couple of years. In other words, they are saying have a long term investment view. As redundant and boring as it may sound, the old investment wisdom holds true even at the present time.
Think of it this way. You have bought good stocks/Mutual Fund after doing extensive research. Now all you have to do is hold them for a long, long time. Only by following this method will you get the wholesome benefits on your capital.
Herd Mentality - A Recipe For Disaster
What is a trend? A trend a thing that is done/performed by a big number of people at the same time. When a certain style makes a prominent presence, it becomes a trend of the season. In the same line, there are stock market trends. However, when a 'trend' comes to stocks it becomes very dangerous. In the stock market, a particular sector draws huge buyers which ultimately makes the sector a trending sector and the stocks in the sector, trending stocks.
If you take a close look at the stock trends you would realise that the element that drives a trend is herd mentality. This is the very reason we call a "stock market trend" an extremely dangerous phenomenon. People, while following a herd, buy a particular stock not because they are convinced about company's fundamentals but simply because someone else is buying it.
In such situations, people don't do any analysis of the stock. Following a stock trend is akin to driving a car blindfolded. It's destined to end up in a disaster.
Beat The Market Volatility With Long Term Investment View
Volatility is virtually a synonym of stock investment. In a way, short-term investors, intraday traders are the people who gain or lose money only due to the market volatility. The high returns come here at the expense of high risk.
Long term investors, on the other hand, are at an advantage in this regard. As they are focused only on the long term stocks which have long-term potential, they automatically disregard the short-term roadblocks which every stock goes encounters in its life cycle. On the other hand, some companies' stocks look very volatile in the short-term but give great returns in long term. Therefore, we can say that long-term perspective drives you clear from all the roadblocks of short-term investment.
Look At The Big Picture
Forget the 'risk' factor, here's an example which explains how short-term investment perspective can fail. Imagine you have a Rs.1 Lakh and you invest it in stocks with a short-term horizon of 6 months. After six months, your vision turns true and you get 25% returns on your invested capital effectively taking the value of your capital to Rs.1,25,000. To get 25% returns in 6 months is a big deal. An ordinary investor would simply go ahead and book the profits. Most of the investors would do the same.
Here comes the catch, when people see big profits then totally disregard the fact that the same stocks can give better returns.
The problem with booking early profits on good stocks is that you don't get to extract the full potential of the underlying companies. Those stocks go-ahead to become multi-baggers and you miss out on 2 things - more profit and regular dividends.