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Before I write anything about this guide, let me briefly define my approach towards money (and life in general).
I love investing in stocks. But its more because I like the process of investing, than for my desire to be rich. Though I would prefer to be rich than to be not-rich, money still does not mean everything* to me. I don’t loose my sleep over it. I don’t want to be the richest man in graveyard. I want to do things that I enjoy – Be with my family and friends, Travel, Read and Write (and maybe continue doing strange things).
*This reminds me of an interesting line by James Altucher – “Money is not everything. Its a side effect. Its a byproduct.”
Having said that, I also feel that if my approach in stock markets is not based on my above mentioned preferences, then it is bound to create a disconnect between my real personality and my investing personality – which will become a cause for sleepless nights (which I don’t want). So I created a small guide for myself. I shared this few months back on Twitter too. Since many readers here are not active on Twitter, I am sharing the guide here.
It is simple enough for everyone to understand. It is based on an easily available market valuation indicator – the P/E Ratio (which is available here).
You too can use this guide as it is or modify it to suit your own personality. So here it is…
As many of you would have observed, the guide is more about avoiding mistakes than anything else.
It pushes me to keep investing when markets valuations are reasonable.
It pushes me to invest even more, when valuations fall further.
And it also pushes me to disconnect (and take a holiday) from markets, when valuations reach unreasonably high levels.
The guide also does not mention anything about selling. That is primarily because the decision to sell is driven more by change in original investment thesis, requirement of money, availability of better investment avenues, etc. and not just broader market valuations.
Caution: The above guide does not mean that reasonably priced good stocks are not available when markets are overvalued (say PE > 26). The ‘taking long holiday’ point simply means that chances of finding a good business, selling at a reasonable price are very low in an overvalued market.
So it is best to avoid such a market and take a holiday from it. And as Charlie Munger once said:
Tell Me Where I’m Going To Die, So I Won’t Go There.
It is as simple as this. If the cost of not venturing into a highly overvalued market is that I may miss out on a few future multibaggers, then so be it (known as FOMO – Fear Of Missing Out).
I prefer not making big mistakes.
I prefer return Of capital more than return On capital.
But that does not mean that I invest only in safe products like PPF, NSC, Fixed Deposits, etc. I have absolutely no doubt about equities and equity-linked products (MFs) being the best bets for long-term wealth creation.
Another thing which I continue doing irrespective of market valuations, is to keep pumping money in my mutual fund SIPs. So you can take that as a confessional disclaimer from my side – that no matter what, I am always invested in markets. 🙂
Note – This guide is not a hard-and-fast rule book that I follow. It simply helps me stay on track with my investment philosophy and more importantly, helps me avoid making mistakes.