It’s time of the year when Warren Buffett comes out with his annual letter to shareholders (Letter 2012). As always, it’s full of insights into the mind of Oracle of Omaha. An interesting point (on Value) made by Warren in the latest letter is –
“If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”
So what can a Stable Investor learn from this quote?
- If you have time and can invest for decades (if not years), then you should pray for bear markets. Bear markets offer shares of beautiful businesses at delicious valuations! Though short term rise in share prices may make us happy, one must not forget that for a long term investor, these are just paper profits!
You can read key takeaways from the letter here, or if you are an ardent fan of Warren Buffett, then you may like to go through the entire letter yourself (Warren Buffett’s Annual Letter to Shareholders 2012).
You can also read previous letters to shareholders.
Caution – Though these letters may make it look easy to earn high returns in market, the fact remains that we are not Warren Buffett(s)! 🙂
In an earlier post about timing the markets, we saw that it doesn’t make sense in trying to time the markets. If earning a better-than-average return is the aim, it is enough to invest regularly in a disciplined manner rather than trying to time the markets.
Let’s suppose that you as have decided to invest at regular intervals. This type of investment can easily be executed by means of SIP or Systematic Investment Plans.
Update (September – 2016) – You can read an updated and more detailed analysis of PE done in 2016 here.
We decided to use this insight to boost our SIPs.
For our analysis, we started with SIP of Rs 5000 every month, from January 2000 and kept on investing till December 2011. A total of Rs 7.25 Lac was invested in 145 instalments. Now we add the Boost. Whenever markets PE fell below 15, an additional Rs 5000 was invested in that month i.e. a total of Rs 10,000 was invested in that particular month. This happened in 23 of the 145 months and an extra Rs 1.15 Lac boosted the normal investment of Rs 7.25 Lac. This took total investment to Rs 8.40 Lac.
So what is the current value of the investment. Did the boost help in earning higher returns? Read further. The investment of Rs 8.40 Lac stands at a Rs 23.8 Lac. And if SIP was not boosted by Rs 1.15 Lac, it would have stood at Rs 19 Lac.
So to summarize,
- You should understand that there is no point in trying to time the market.
- Best way for common investors to enter markets is to invest via mutual funds and take the SIP route.
- If you are ready to track overall market PE regularly, you can augment your SIP investments as detailed above.
- But even after discussing the benefits of regular investments in markets & redundancy trying to time the markets, if you want to time the markets by investing in direct stocks, you should stick to shares of large & stable companies (Read about how to find Large Caps selling at massive Discounts!)