Sunday, January 15, 2012

Chapter 4: Don’t be a bull or bear in the Stock Market

The triangular headed South African python is a truly awe-inspiring reptile - massive in length and weight, immensely strong with an intricately patterned shining skin. The other day, on the National Geographic channel, the camera followed such a beauty as it slowly slithered through the bushes and weeds and glided into a watering hole.

There it hid with only its snout above the water - and waited patiently. Day followed night and night followed day - and still it waited. Animals big and small, frisky and sloth, came to the watering hole for a drink. The python didn't move.

Six days and nights passed - and no one except the camera-person knew that the python was lying in wait. On the seventh evening a herd of deer came for a drink. A younger member ventured a little further in from the water's edge - unaware of the peril.

Suddenly, the water hole exploded into action. With its immense muscle power, the python lunged out like greased lightning and in the blink of an eye had wrapped itself around its prey. The poor animal probably didn't even know what hit him.

The South African python is used to spending weeks and even months without feeding. Some times it eats the odd rodent or bird. But when it really wants to eat, it plans its every move and with infinite patience grabs a large meal so that it won't have to eat for a long time.

Like the python, a successful long-term investor does not need to 'feed' (i.e. trade) every day or every month. Once in a long while, the stock market provides an ideal opportunity to grab a few frontline stocks at mouth-watering prices. Back during the 2002-2003 bear market period, stocks like Tata Steel was available at 100, M&M at 90, ITC at 60 (actually 600 for a Rs 10 share). All three subsequently offered bonus shares at 1:2, 1:1 and 1:2 ratios respectively.

There were many other shares going for a song and which made a ton of money for savvy long-term investors. Since then, there was a one-way bull-market with V-shaped corrections in 2004 and 2006. But after 5 long years there was a full-fledged bear market from January 2008, which ended in March 2009.

For long-term investors, the period from January 2008 to March 2009 was the right time to behave like the python. Not to jump in, but to conserve their muscle power (i.e. cash), decide on a few target companies and wait patiently for the market to start rising.

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