Strategies for Investing Successfully in the New Stock Market

The stock market has shown some interesting moves lately, no doubt. By our last review, we had highlighted that the unrestrained price descent, precipitated by unbridled fear of market collapse, had noticeably run out of steam. The market had entered a waiting phase, looking for either another fear-factor to trigger more price decline, or something positive to propel some level of recovery. For the period from March 26 to April 17, 2009, the market simply traded sideways, with the index staying virtually flat.

From Consolidation to Recovery
Out from that consolidation period, the last four weeks have seen more emphatic market action. The market took a more confident outlook, posting some volume improvement and recording impressive price recovery. Between April 20 and May 13, 2009, the NSE All-share Index had sped up 5575.44 points (27.64%), closing at 25750.42, up from 20174.43. Market capitalization was in similar recovery trend, recouping N1.33 trillion in the period.

This week opened on a sustained upbeat note, which kept the index trending up. However, that couldn’t easily push it past the 26000 mark. The market slackened again Thursday May 14, losing 197 points and went down further on Friday, closing at 24796.42.

Now, that shouldn’t throw you into another bout of panic. These prices won’t keep a straight upward trend, for various reasons. Profit taking, for instance. Also, certain resistance points will take some vacillation to scale through. So, swings will be expected, but that’s some money-making opportunity for swing traders.

Anyway, where does the current market outlook leave you?

Investing in the New Market
Firstly, you too should begin to build some confidence about the future of the market, if you were one of those that totally lost faith. The innate capacity of the market to recover even from a deep crises – what seemed like total collapse – has been pointedly shown. Even if it should slip again, it ought to be easier now to believe that recovery will eventually come. That should place you in a more sure-footed mindset to explore opportunities and strategise your future commitment to the market. If the larger economy were to get nudged into better performance, the prospects for the stock market would get even better.

Secondly, expect the market to be less robust, this time, especially in the immediate future. The market will react more sharply to developments that affect a stock or the entire market. Time was when certain occurrences with implications for stocks seemed ignored and hardly made much impact on prices. Now, expect more sensitivity to such triggers. That’s based on the natural “once-beaten-twice-shy” principle. Or, as some part of the country puts it: “if bitten by a snake, you will scram at sighting even a lizard”. More investors and traders will get quicker to the draw, bent on preventing the untidy experience they just went through. Over time, investors could forget and get back to old ways, but for now, don’t expect them to take chances. For you, that means you must be sharp-witted, too.

Strategies for the Future
If you are investing in the market, understand that a fundamental change has taken place, because the recent experience will stamp its footprint. This is no time to take the market for granted. You need to do your homework and that simply means having a framework to work with. No one is talking of any complicated investment matrix. But you need a few personal rules to optimize your effort. It’s all about sticking to a few proven rules and applying the investment disciple that recognizes market risks. Nothing outlandish, really. Here are a few ideas that may be helpful:

Buy Carefully
Now, you must know why you are buying a particular stock at any time. That means you have a basis to justify the investment. If you have a few firm rules here, it means a stock getting into your portfolio sufficiently merits it – it meets some carefully chosen criteria, depending on your investment goals. Put differently, it has to have a strategic fit into your portfolio. At another time, we’ll be looking at some criteria that can be valuable in your stock selection process, but you can take a quick look at some old material here.

Protect Your Investment
It should be obvious now that protecting your investment and gains is as important as finding good stocks. Recent experience has shown how quickly a 400% paper gain on a stock can fizzle off and turn into a 70% loss on investment. Strategies for protecting your investment and the gains that accrue should be a priority. And why beat about the bush, when some proven, easy-to-apply systems have been established? We’ve given them before. Now, you should be focusing more on understanding and effectively using these protection strategies. To learn more, read this article.

Be a Long-term Investor with a Trader’s Instinct
Long-term investors buy into companies with a relatively long-term perspective. They expect to hold for some time, so they screen for companies that have current and future value potentials that meet a set target. Traders and speculators try to ride price swings and are not too concerned about company value and long-term potentials. The ordinary investor is not a trader. That means you need criteria that enable you select stocks that you can hold for value and ride into their future growth.

Once, holding was akin to the typical buy-and-hold, where you stayed with the stock, come rain come shine. Typical buy-and-holds won’t even bother what else happens to the stock. There are two flaws there: clear opportunities to optimize investment value by riding price cycles are missed. You may check again how Floyd Bostwick Odium exploded into wealth by riding price cycles. Also, if you are unlucky to need money at the low price point, you are forced to realise a huge loss.

Now you must understand that long-term investing still needs a trader’s instinct. You need to watch the trends. Clear signals of major shifts in the market or for particular companies should induce some action. You may need to act to protect your investment value, or to take further advantage of opportunities. So, you must sell when it makes every sense or switch stocks when emerging opportunities dictate so. Don’t just stay married to stocks you buy on a “for-better-for-worse” basis. You will do well, perhaps, but may largely sub-optimise.

Finally, let’s just say that more investors will be sharper, responding more swiftly to trends, going forward. If you fail to raise your game, don’t be surprised when you’re left carrying the can. Seeing trends early requires following the market and you don’t have much choice if you are invested in it.

Strategies for Investing Successfully in the New Stock Market

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