Patience is the key for Long term Investors

According to Warren Buffet "You only learn who has been swimming naked when the tide goes out". For almost two years people have been making money on the Indian stock markets, irrespective of the fundamentals of individual stocks. So it is difficult for most of us to accept the current downturn in the markets which has eroded our investments significantly. Human behaviour is hardly rational, so the markets extended the excesses on the upside a few months ago, and now they are showing excesses on the downside as well. Even good news is seen as bad to push the markets down further. A reasonably OK budget has been given a thumbs down by the markets just because of one or two negative features. But this is again going to be shortlived, and the markets would ultimately reward 'value investors' in the long run.

Broadly speaking, there our two types of players in the markets: 'Value investors' and 'Momentum players'. If you consider yourself as a momentum player, you would have made a lot of money by investing in momentum stocks like IFCI, RPL, REL, GMR Infra and a whole lot of Realty stocks. These stocks gained anywhere between 50-300% within a short span of six months upto 8th January 2008. The fall in their prices since the peak has also been equally strong. If you consider yourself as a value investor and have invested in bluechip stocks like Tata Steel, ITC or some fundamentally strong Pharma stocks with a long term perspective, you should not mind an erosion in your portfolio to the extent of 10-20%, in this fall. A value investor should not be perturbed with these temporary swings in the market, because his long term portfolio is sound.

However, the problem gets aggrevated when a 'Value investor', who has bought stocks with a long term perspective, starts behaving like a 'Momentum player'. There is every likelihood that he will end up losing money both in a rising market as well as a falling market. He would then tend to buy on a rise and sell on a fall. Remenber, the gains and losses in the portfolio on a day to day basis are only notional, unless they are booked. Long term investors should be guided by the principals of Benjamin Graham and Warren Buffet, and stay invested for long term. The fall in markets can be used to build a sound long term portfolio, by investing in 'Value Stocks' with high earning visibility in the long term. The long term growth story of Indian Economy is intact.