Investing in Value

As an investor, equity shares offer the possibility of outperformance over a long term horizon. But the entry price is critical to achieve this target. When stocks are purchased during bubble periods, the investor can be confronted with many years of underperformance even when the broad market remains upbeat and the nation’s economy is doing well.

Therefore, the best way to invest in stocks is to buy on a significant correction or buy stocks that offer value even in bubble like periods.

The trading approach is different. The day trader, swing trader or even the position trader who is looking to buy for days to weeks should be more interested in the trend and momentum, rather than in value.

What actually works out is a mixture of investing and trading. Investors buy overvalued ‘hot’ stocks for the long term, but actually expect these stocks to perform in the short term. (Okay, this is what a trader does sometimes, but traders look at a number of technical methods to enter which includes a clearcut exit strategy.)  Later, when some of these ‘hot’ stocks underperform, as they will, the investor is left holding the stocks, with the funds locked in for many years, and, also a sense of frustration.

The sensible way to investing is to buy only when you should, not to go with the herd. But in the market, it is often difficult to follow the easy way. What do readers say?