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f all one is looking for is a simple formula in the context of the stock market, there can’t be anything simpler than the popular ‘buy low, sell high’ mantra. However, if one seeks to make a fortune, there can’t be anything more misleading than this simplistic prescription. In fact, the very dichotomy between this formula and its feasibility is the reason why several investors fall prey to dangerous assumptions and burn their fingers. Consequently, many investors cling to imaginary notions of market movements in sharp contrast to the actual fluctuations, thereby paying a heavy price, whether through hasty purchases, premature profit booking or by staying invested for too long. One also invites the burden of fees/levies arising from frequent trades.

It is hence imperative that we understand the tenets of ‘buy low, sell high’ mantra before making sweeping observations about its efficacy or the lack of it. Unpredictability runs at the core of market movements, and the proverbial concept of ‘future prices’ is only an approximation at best. Why is that so? Because putting a value to a stock is a function of various factors. It is not just about the company’s products and services, competitive landscape or leadership team; it is also about monetary and fiscal policies, global cues and a host of unknown variables that may affect the value more deeply than anyone would have imagined.

To make matters even more complicated, herd mentality is invariably at play, which has marketing touching extremes on either side–highs as well as lows. It is largely in hindsight that one is able to decipher the role of sentiment in driving prices higher and lower, as also to determine whether the price is too low or too high. There are very few who can spot opportunities amid extreme situations like the dotcom bust or the 2008 meltdown when prices of even good scrips touched rock bottom and presented a great case for value buys.

Even analysis has its limitations. That’s precisely why machine learning algorithms tend to miss scores of elusive opportunities, which make the ensuing models far from foolproof. Talking of market indices, they provide a rich reference value at best, one that helps us understand where the market is placed and where it is likely headed, but it doesn’t convey a holistic picture of the market and its movements. A prudent selection of stocks is not a matter of chance but a function of conscious choice. No wonder, many investors suffer huge losses in the lure of chasing penny stocks or blindly following tips from experts and enthusiasts.

The stock market inevitably goes through a litany of highs and lows, a mixed outcome of speculative forces and macro-level triggers, both global and domestic. Having said that, we can never really fix definitive levels for lows and highs. More importantly, our reaction to lows and highs differ greatly. The highs tend to make us overconfident and the lows tend to make us panicky, rendering us incapable of making sound decisions.

In stock market investments, it is important to comprehend the big difference between risk and volatility. At times, investors have to bear with long periods of lull or even negative growth before they see returns. This is because markets may be subdued during cyclical phases, which does not mean it has turned risky. Risk is the uncertainty of investment returns from factors like interest rate fluctuations, political uncertainty, credit issues, inflation and liquidity problems. Volatility, on the other hand, is the variation in investment value over time, which does not amount to risk in the case of fundamentally strong stocks. Rather than fear volatility or take it for granted, investors must put it in perspective. Volatility can become a long-term friend if one focuses on individual stocks and their earning trajectories. For long-term investment, one must place faith in stocks with resilient business models and professional managements. Often in big downturns, the market doesn’t spare any stock. Yet, robust players retain their value props, thanks to their core competencies.

If this sounds easier said than done, for trading and investment decisions, it is best to engage a competent financial adviser who can help you make the most of your investments.

Nitasha Shankar is PRS-head research at YES Securities.

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