Friday, September 25, 2015

When to Buy Common Stock?

To create wealth by investing in Common stocks is a long journey full of troughs and peaks leading to overjoy & heart-breaks even to the most experienced investors. The purpose of common stock market is to create wealth by directing the capital to the most efficient businesses. And it is the responsibility of every investor to identify the businesses which have the ability to create wealth in a sustained manner over a period with limited available capital.

In the process, one of the important question an investor needs to address is - when to buy common stock? The core question which every investor faces is uncertainty about the movement of common stock price in future. This uncertainty is the biggest enemy of an investor. An investor may find a good stock but delays the purchase due to this uncertainty. Ideally an investor should buy common stock if the stock is value buy as per well-defined principles and sufficient ‘margin of safety’ is available. If the market price of common stock trends below the buy price of common stock, an investor couldn’t have asked for a better bargain. In such situation, investor should keep buying and increase the stake in the stock. If the stock price goes up, an investor should keep buying till the time she believes sufficient ‘margin of safety’ is available. 

Allow me to explain this point by giving example of my buying pattern of ‘Manappuram Finance’ – a stock which I currently own. I started buying Manappuram Finance in Sep-14 and have been buying it over last 1 year, all this while stock price oscillated between ₹20 & ₹36. I believed the stock is a value buy at ₹ 34.25 (my highest buy price) & felt overjoyed to buy the stock at ₹ 20.2 (my lowest buy price). 

It is certainly not possible for an investor to time the market. An investor should buy the stock if she has surplus to invest and believe the stock is available at a good value. An investor should go back & re-analyze her thesis if the stock price falls significantly. An investor should buy the stock in truck load if she believes that the price is going down due to the irrational behavior of the market participants and not due to the paralysis of any of the business parameter. An investor shouldn’t suffer due to the wrong decision making of other market participants.

An investor should never consider the stock market indices (Sensex, Nifty) value while buying a stock. It is important for investor to understand that these indices represent only a few large stocks. There are hundreds of other common stocks which get priced irrespective of the market indices movements. She should be only cognizant of the fact that it might be difficult to find a stock available at a good value in a bull market; her task certainly becomes easier in bear market. However, bull and bear markets may last from days to years & wait for next bear market may frustrate an investor which may lead her to enter in a wrong stock at the wrong time. Hence, an investor should buy the stock if the same is available at a good value irrespective of the indices levels.

I would be delighted to hear your views on what all aspects you consider while buying common stock.

P.S: This post is in no way to be construed as recommendation of 'Manappuram Finance'. I own Manappuram Finance and my views may be biased towards the stock.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

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