“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman
“Know what you own, and know why you own it.” Observing Indian investors allocate money into asset classes gives one the feeling that people are violating this cardinal investing ethic. Quite evidently, Peter Lynch said this with an intent. Assets must be owned with a reason. But, look around and you will find people buying their third and fourth apartments. Or, the Villa with amenities that will cost you exorbitant sums to maintain which most buyers can ill afford. Farm lands which one buys and keeps idle is another popular investment choice. When an invested asset is difficult to consume, utilise or put to productive use, the only thing you can possibly bet upon is capital appreciation. The trouble with investing based on capital appreciation is that if there is no other scope for returns from that asset, you may well need to spend money on it to maintain it while having no returns from it. It is this predicament that most investors in the assets described above face. Stocks on the other hand give out dividends and therefore don’t carry maintenance costs that are too material. Investing should always be done with a measure of returns other than capital appreciation; like base rental returns, production of crops or any other avenue to generate returns. The lack of any such returns from investments in land, homes & weekend villas is hurting a lot of investors. The last straw will possibly be a sharp fall in prices which will dash all hopes of capital appreciation and that will leave the investments bereft of their basic premise. The root cause of investor agony is owning assets without knowing why you own them. If one still owns assets where the basic premise has already changed, the best thing to do is to exit the investment. It is better to get out before it may be too late.
istrat: Avoid taking a short term view. Look at a 3 Year investment horizon.