Whenever I meet someone who is interested in stocks, the conversation steers towards mentioning of a few company names. Often that someone buys shares of the companies I mention. But when I meet them again later, they complain that they are not seeing any increase in price and that they sold it at a loss. This has been a very repetitive theme. This post tries to explain why it works just for me and not you.
I belong to a breed of investors called as Value Investors. Their goal is to buy something cheaper than what it is worth. To make the theory sound better. Imagine you are going to a grocery store and suddenly see that rice or oreo cookies are priced 50% cheaper than normal. You look for the expiry date and ensure it is all fine. Now what would any sane person do at that point. “Buy as much as one can”. That is exactly what I do when it comes to buying stock in companies – “Find them cheap and accumulate. ”
Now, there is a difference between buying rice and stocks. When you buy 10 kilos of rice, you end up cooking and eating them. But when you buy a stock, your motivation is to sell it at some point in the future.
Please note that there is a breed of people who never sell any shares, they just buy and sit on it. Folks like Warren Buffett belong to that category. But most Value Investors, including me, we end up selling those shares when we feel the price is more than the value of those shares.
Here is the most important thing – “It is impossible to guess WHEN the price of the stock you bought will go higher than the value of that stock.” So what is the solution. The one and only solution is to be patient. Just wait until it reaches that value. This wait can be days, months and even years. I have a bank stock I am sitting on for the past 3 years and it still has a long way to reach its worth.
So if one does not wait patiently, they will end up selling it for less than what it is worth and end up losing money. Now go read the first paragraph again. I hope you understand the problem now. So next time, if you run into me and we are discussing a stock, please note that my plan(e) has a really long run way. Don’t expect A380 size returns when you have a very short run way. In fact, if you try taking off a huge plane on a small run way, there is a 99% chance you will run into an accident.