Market participants and financial media regularly classify stock purchase decisions based on the time horizon or holding period of the investor (i.e. how long can the investor do away with his money and put it in stocks). This classification is usually styled as long term, medium term and short term.
There are absolutely no fixed rules as to what constitutes either of these time horizons. Some buy shares to pass it on to their future generations while others buy hoping to make a trading gain in the short term. I have interacted at length with those who are convinced that the stock will trade higher by the end of the day. They mostly buy stocks for a few hours and do not follow any particular stock selection criteria. So long as they trade in high quality large-cap stocks (i.e for example in BSE Sensex 30 companies) and buy and sell with predetermined time-frames, their likelihood of being correct / incorrect is an exact 50%. It’s like flipping a coin and predicting which side it would land. I never argue with such investors or question their decision, because I am likely to be correct / incorrect in exactly 50% cases.
Those who want to add a little more certainty to their stock purchase decisions would probably like to have a longer term outlook. In fact, as a fundamental investor, the longer you give yourself, the higher likelihood you have of being correct. There is a large group of investors, who want to invest in the market for anything between 3-6, 6-8, 8-12 months. Naturally then, they are always looking for the best stocks for medium term investment in India. For those who like to invest based on company fundamentals and on the strength of a companies’ products / services, it is a difficult thing to do because no matter who tells you otherwise, the truth has been and will always remain simple – “there is no full proof system to be accurate in the short term”.
That said, you can sure indulge in educated speculation based on the likely news flows in the near term such as general economic outlook, increased competition, successful launch / failure of new products etc. It is definitely possible to beat the 50% success / failure rate with your medium term investments if you research well.
Medium term investment: List of things to check
- Select stocks based on the strength of a company’s fundamentals.
- Avoid buying into badly managed companies with poor financials – typically such companies periodically generate investor interest as their shares get marketed by operators.
- Look at previous track record – has the stock price been volatile (i.e. up and down every few years or months), if so, just avoid.
- No matter what you do – never buy based on a stock ‘tip’, even if it comes from the chairman himself. You will eventually lose money. The 50% success / failure rate applies equally to such tips.
- Also, if I may mention, medium term investment success has nothing to do with the market capitalization of the company (i.e. the notion that either of large-cap, small-cap or midcap stocks in India are the best for medium term is completely false).
- Most importantly, invest in businesses that you understand.
As a general rule, irrespective of your time horizon, you should invest in stocks of companies whose business you understand. This becomes even more important when you are investing for the medium to short term. For you to be successful in predicting the future movement of the stock, you must be able to comprehend both, (i) the likely impact of future developments in the industry in which the company operates as also (ii) the importance and possible outcome of company’s internal plan.
Analysts who closely monitor a company for a few months or years are able to gather valuable signals about the impact of sector specific news and have a definite edge over investors who do not understand the nuances of the business.
I have met more than a few research analysts who are not only able to predict the impact of news on the stock price (before others), but are often able to predict the news itself. Needless to say that such level of sophistication with analysis requires a lot of commitment and involvement. That said, such level of indulgence is not mandatory for you to make educated speculation. Just understand the business and the sector well, continue reading good stuff and keep your eyes and ears open, you will be amazed at how quickly you will start getting it right.