Tuesday, March 27, 2007

Investing: Long-term vs Short term

"In the long run we are all dead".
"Time in the market is more important than timing the market".

Two absolutely divergent views on investing, based on individual perspectives - long term and short term.

I was reading,thinking about the two diverging approaches to investing, namely fundamental and technical analysis.

Fundamental analysis is the study of companies based on the its balance sheet, profit & loss account and cash flow statement. It also looks at other factors of the company to assess whether one should invest in it. It focuses on the business of the company and the profits its generates. The people who practice this tends to have a longer term view. The greatest example of this is Warren Buffet and Peter Lynch - two of my all time favorite investors.

Technical analysis on the other hand is a study of the market dynamics. It presumes that the market reflects all the information about a company's valuation. As any market, it focuses on supply and demand and variations of price due to a gap between them. The 'technicians' rely on price & volume chart patterns and look at historical data to predict the future of a stock.

The fight between the fundamentalists and technicians are eternal as they have two diverging views of the investing world.

I, personally, am more of a fundamental analyst, although I am trying to learn and gather experience on technicals as well.

So, which is a better option that a retail investor should take?

The answer to that question in my opinion is, it depends on the type of market you are operating in. Its good to know both and use them judiciously. Also, I think, that the holding period needs to dependent on how the company is doing. Most people tend to fall in love with their stocks once they hold it for a while.

My idea is get out of your stocks once in a while if they are not performing as well as you think it should have. In the Indian context, this year we may see a range bound market with a trading range of 11500 to 14500. So, buying at the lower end and selling at the higher end of this range may be a more remunerative option than just buying and holding.

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