Conventional wisdom suggests that when the markets have a correction and a dip, one should invest for the long term to take advantage of low valuations resulting from the correction in prices. This is a time tested policy and has stood a lot of investors in good stead.
However, those of you, who have been following the market closely, particularly over the past few weeks, will agree that the markets are passing through an uncertain phase with the market trading in a very wide range of Nifty fluctuating between 4600 and 5500. With the US markets showing no indications of an improvement in the near term, it can be safely assumed that we shall also pass through an extended phase of uncertainty where the Nifty may continue to fluctuate in this wide range for many weeks, if not months. A very wide range of 900 points on the Nifty gives an opportunity to us to take advantage of this situation.
If the above is believed to be true, I would stick my neck out to suggest that even Investors, those who buy stocks with a long term horizon, should change their investment strategy, in the near term at least, and take advantage of the volatility in the market. I would recommend that the strategy ought to be to ‘buy a dip and sell a rally’. That is, one should look for opportunities for making a quick entry, and a quicker exit once you make a profit. Investors ought to buy market leaders whenever there is a dip and rather than get ‘married’ to the stock, look forward to booking their gains whenever there is a rally and then wait patiently for a dip again to reinvest. Before doing this, you should put in some effort to find the range for each of the shares you wish to invest in to time your entries and exits correctly. For the readers who find it difficult to determine this range, we shall be most willing to help them out. So feel free to send us your queries. Why I am suggesting purchase of market leaders is because whenever the sentiment changes for the better, and it surely will do so eventually, it is these large cap market leaders which will be the first to rally. I am quite sure that most investors will be able to get opportunities to book profits in this way at least a couple of times, if not more, before the market finds a trend for itself. This will lead to a reduction in the long term cost of holding for these shares,
What can go wrong with this strategy? The market may not come down after we have sold our stock and we lose an opportunity to get much larger gains that we can expect if we buy and hold for a long period of time. Yes, it certainly can happen. We should keep a close watch on the short term and intermediate term trends and the moment both of them come in sync with the Primary ( Long term ) trend, which is up, one must buy, whatever you wish to, for the long term. At least I am quite confident that we should be able to get two three occasions to book our profits by behaving like a trader before the three trends start moving in the same direction. This policy will also protect you from losses should the primary trend also turn bearish in future. And, of course, when you start behaving like a trader you must have your stop losses and exit plans in situ to avoid unpleasant situations.
Did I hear somebody say that the policy I am recommending is being “penny wise and pound foolish?” Well today’s piece is written specifically with such skeptics in mind.
Contributed by Col. Mahesh Sharma
However, those of you, who have been following the market closely, particularly over the past few weeks, will agree that the markets are passing through an uncertain phase with the market trading in a very wide range of Nifty fluctuating between 4600 and 5500. With the US markets showing no indications of an improvement in the near term, it can be safely assumed that we shall also pass through an extended phase of uncertainty where the Nifty may continue to fluctuate in this wide range for many weeks, if not months. A very wide range of 900 points on the Nifty gives an opportunity to us to take advantage of this situation.
If the above is believed to be true, I would stick my neck out to suggest that even Investors, those who buy stocks with a long term horizon, should change their investment strategy, in the near term at least, and take advantage of the volatility in the market. I would recommend that the strategy ought to be to ‘buy a dip and sell a rally’. That is, one should look for opportunities for making a quick entry, and a quicker exit once you make a profit. Investors ought to buy market leaders whenever there is a dip and rather than get ‘married’ to the stock, look forward to booking their gains whenever there is a rally and then wait patiently for a dip again to reinvest. Before doing this, you should put in some effort to find the range for each of the shares you wish to invest in to time your entries and exits correctly. For the readers who find it difficult to determine this range, we shall be most willing to help them out. So feel free to send us your queries. Why I am suggesting purchase of market leaders is because whenever the sentiment changes for the better, and it surely will do so eventually, it is these large cap market leaders which will be the first to rally. I am quite sure that most investors will be able to get opportunities to book profits in this way at least a couple of times, if not more, before the market finds a trend for itself. This will lead to a reduction in the long term cost of holding for these shares,
What can go wrong with this strategy? The market may not come down after we have sold our stock and we lose an opportunity to get much larger gains that we can expect if we buy and hold for a long period of time. Yes, it certainly can happen. We should keep a close watch on the short term and intermediate term trends and the moment both of them come in sync with the Primary ( Long term ) trend, which is up, one must buy, whatever you wish to, for the long term. At least I am quite confident that we should be able to get two three occasions to book our profits by behaving like a trader before the three trends start moving in the same direction. This policy will also protect you from losses should the primary trend also turn bearish in future. And, of course, when you start behaving like a trader you must have your stop losses and exit plans in situ to avoid unpleasant situations.
Did I hear somebody say that the policy I am recommending is being “penny wise and pound foolish?” Well today’s piece is written specifically with such skeptics in mind.
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