Monday, September 13, 2010

Default Strategy for Investment Helps Make Me a Better Investor

For people who invest in the stock markets for the long term, perhaps the most critical point to note is to have a default strategy for action. This is a very overlooked part of investment and forces many otherwise brilliant investors to do foolish things. Most people tend to like action and that is why they buy or sell stocks to get into “action”. This results quite often in either selling good business too early (booking profits to satisfy the “action” bug) or to buy into questionable companies following a “tip” heard on TV(or from a friend).

I have the same problem. So, here is what I do to keep myself safe from the “action” bug. I have a default investment strategy. That is whenever I have money and do not have a company that I really want to buy, I buy into either a liquid fund (typically LiquidBees on NSE) or buy into an index fund (again typically NiftyBees on NSE). I chose a liquid fund when I don't have a good company identified and I feel the markets are overvalued. I chose a index fund in all other circumstances.

On the contrary, when I have a good stock I want to buy at a valuation I am comfortable with I sell either the liquid fund or the index fund and buy into the identified stock.

This approach has helped me a lot in stopping myself from doing stupid things. I hope it works for you too.

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