This article is the first in a six-part series on common market myths. Why market myths? This is because every investor who deals with a broker or investment adviser, or who consumes the financial press in its myriad forms, will be confronted with these truisms designed to make the complex look easy and the risky look like a sure thing.
While some of them contain great investment wisdom, a whole bunch of them are misleading and deserve to be discarded. For instance, industry folk enjoy quoting Warren Buffett, saying that the ideal holding period for a stock is “forever”. That’s nice. But it isn’t useful to the average person who’s trying to send a child to college on the strength of an investment portfolio or saving up for retirement. Stock brokers might follow up a hot tip with the advice that you should “buy on rumours and sell on news”. Again, that’s nice. But which rumours? And what if they never make the news? I fear, that in an attempt to remove subjectivity from the investment process, they largely fail to do so.
So, therefore this series of articles should be most useful whenever a broker, friend, or a random investor utters one of the phrases (or something close to it) and he investor would want to know where they are being steered.
Part 1: Buy When There Is Blood on the Street
The saying “buy when there is blood on the street” was made famous by the legendary investor John Getty, the oil tycoon. It is a very popular strategy that often times flatters the investor. That while everyone else is panicked or destroyed, the investor heroically walks the battlefield, looting from the foolish dead. The saying is just another way of telling investors to buy stocks at their bottoms, or to buy the whole market at the bottom.
There’s nothing wrong pursuing the strategy if the investor has an acute sense of when the market has bottomed, and they are right in all cases. However, the problem is, it is humanly impossible for any investor to consistently invest throughout their entire life at exact bottom of the market.
Let’s take a real example. In between 1994 to 2002, the NSE 20 Share Index fell from a high of 4,559 to a low of 1,087 – a 76 per cent decline. No doubt, had any investor been able to buy shares at this bottom (at 1,087) and then held them until 2007, when the NSE 20 Share index reached its high again, they would have enjoyed a staggering 319 per cent return. But how would any investor have known to wait that long? Remember, the Index fell by 76 per cent. A drop in the NSE 20 Share index, which would have been a 35 per cent decline, might have seemed plenty attractive to most investors. But at that point, the market was set to fall another 1,876 points. This scenario applies to individual stocks.
In all, this logic seems great on paper but it is nearly impossible to execute. Hence, investors ought to be very careful in following such timing advice. If it is a must to pursue such a risky strategy, investors at the local bourse should at least check and confirm (and re-confirm) the timing of their entries with company and/or economic fundamentals. All the best.