Sunday, October 23, 2005

Active Waiting

Buffett has said, "Mr. Market will throw stocks at you everyday. Only if the stock lies in your circle of competence, you throw your bat at it."(From memory)

But is it not in contradiction to the very nature of human beings to keep it simple, to be inactive.
That is the precise reason as to why I think that many people are ready to buy stocks when everybody is buying and not buy when other people are not.(It is better to die with people than be left lonely...syndrome) This feeds on itself. Contrary to this there are guys who actively wait for bad times & start swinging.

In the words of Peter Lynch,

"When everybody is exiting, you enter the supermarket and when everybody is entering you exit." (again from memory, I am wondering if my memory is bad or good!!!)

When you plan to buy & sell stocks you have nobody to imitate but follow your conviction. It pays to be a contrarian but you have to be your own counsel. I will try to list out 2 approaches that can be used & disadvantages therein. As far as advantages are considered, if one can overcome the disadvantages, you have a home run...

Much like Munger, "Just tell me where I am going to die & I will not go there"

Stock Based approach:

I define this as a situation where we calculate the value for a company & wait for the stock market to quote it that value. (Akin to Buffett's Grocery list approach). This has its own (Psychological) drawbacks.

Disadvantage:
  • Excessive Self Regard Tendency: We have put in all the effort and made up the mind to buy it at a given price. Why can this be bad? Because we can stop being a rational being & become a rationalising animal to prove ourself right by finding or making reasons in discounting the changes that may have taken place since our default price. Commitment Bias, Hindsight Bias, Anchoring Bias, Deprieval superresponse syndrome(If it takes much time to get to our listed price) are the results of this tendency and can have an effect on our decision making process.
In short, when you are made to wait for something, you can get possesive about it when you finally are on the verge of having it.

Theme Based Approach:

Every now & then to keep looking at the selected group of stocks based on Financial & price variables. (LOW PE, DIV YIELD, Beaten Up in the last Few months & things like that) & evaluate them.

Disadvantages:

  • Method gets tested here, in that sense it becomes very important that we don't put unnecessary presure on ourselves by attributing failures to the method when they may not be the culprit.

Conclusion:

I think that each one of us have varying degree of psychological reaction pattern. Thus, it becomes a matter of what suits you rather than "this is the right approach" kind of thing.

Knowledge grows through sharing:

I welcome thoughts of the readers who have dealt with this problem and their experience therein. If sufficient responses are there may be we can discern a pattern for a possible solution!!!

Thank You in advance.

2 Comments:

Blogger Pedaran's Adventures said...

Nice blog. I just started my own value investing blog tracking my learning process at http://pedaran.blogspot.com/

Please add a link.

~ Pedaran ~

12:34 PM  
Blogger Sandy said...

From my own experience I think both the approaches are necessary. For e.g. I have studies some of the companies (that I understand, and very much would like to own them)however I am ready to wait till they quote the price that I want. However in the interim, I do take a theme based approach for current investment.

12:52 AM  

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