Investing in the Colombo Stock Exchange – Volume 02

Equity (Stock) Market

There is a popular saying amongst the investor community that, you can’t beat the (Equity) market, true but when?, if it’s well regulated, all the information (Public) are taken by the bourse and reflected in the share prices, no insider trading whatsoever having a say etc, then of course you can’t beat the market. If the market cannot be beaten by regular investors, then either fundamental or technical analysis has least use in picking the stocks they say (who are that they? well they are the Investment gurus). 

In these types of market “Passive Investment” strategy has major role to play, which strategy is buying a set of well diversified (don’t put all your savings into the same bank) share portfolio  and keep it for a long term, return would be in the form of dividend and capital appreciation in 10 or 15 years down the line, some will ask, is it worth the wait for given so much years of locking the fund?, I would say yes it is, because historically, world “Equity” market has seen almost double return than the safe house government bonds yield. I would like to emphasis a point here that, I’m not talking about the Colombo Stock Exchange, above said attributes can be found in the  markets which are operational within the USA, the UK, Germany and few other developed countries. Okay then what are the strategies can be deployed by a smart investor at the Colombo stock market?

At the CSE

Golden period of investing in the Colombo stock bourse have long gone, at least I feel, it’s absurd given that CSE had seen 100% YOY growth consecutively during year 2010 and 2011. CSE had all the reasons to be seen at  lime light and all the hype it had, but certainly not the 100% appreciation in that shorter span, true North & East region opened up, FDI were flowing, private sector credit was  growing, currency was appreciating and all the economic indicators were dimming  green light, but a sustainable growth will happen in longer period, certainly not in short term, if the immense of growth seen in the short span then it’s obviously not sustainable, but merely a credit bubble, it’s not reflecting true picture of  economy nor  stock market of the country. Exactly this what had happened in the CSE too, brokers now say market itself correcting its flaws, and the same mouth said two years back bourse will see further appreciation and this is the time for investment, how many of greedy investors would have burnt their liquid cash By following brokers buy reports?. I’m writing this blog post just after ASPI index had gone below the 6,000 points, which was long time resistant point and whenever it reaches the verge of 6,000 somehow market had seen sudden boosts by some institutional investors, but this time it was not the case and me too wonder why.

Strategies that would work better at the CSE

Passive Investment strategy

Let’s discuss few strategies or methods that would better work in the CSE, I still believe above mentioned “Passive” strategy will do wonders in the Sri Lankan market too, pick some growth stocks, thus normally they don’t pay the dividends year by year, but they do reinvest the profits in new investment avenues and strengthen their market presence, hence this will ensure share price appreciation over the years and the investor could make a reasonable gain by the time he/she exiting from that particular stock, again be mindful about the industry they operate in and the macroeconomic or policies which affect that particular industry and of course the actions of its main competitors, if you wish to earn return you have to be watchful, there are no free lunch for anyone, so intense scrutiny over capital market is a vital trait for a smart investor.

Large Cap strategy

Large Cap stocks strategy, thus these type of stocks have larger market capitalization (Share price * No. of shares outstanding) amongst the market and this would be suitable for risk - averse investors and those who plan equity market for retirement plan, because these genre of stocks have very small share price fluctuations and have larger market liquidity, often considered as large dividend paying stocks and when exiting this too will provide an investor with substantial capital growth in the form of share price appreciation, certainly higher than the real return we get from the bank deposits.

Active Investment strategy

“Active” investment strategy as the name implies, an investor needs to be active in the market, thus they should monitor their particular stocks price movements every day and also have to do some basic research on the sectors, industry their companies operate in, as any adverse micro or macro conditions will have an impact on companies performance, but these will be only reflect in the upcoming quarter reports, if you are a wise investor and you could gauge those information by doing some basic research, then  you can be better off than your fellow investors, either it can be action of hold or sell the stocks.

What strategies that won’t work at the CSE?

Often it is a misconception that,  if you actively buy and sell the shares you will gain a bit at end of the day, yes numbers don’t lie, but did you take into account of transaction costs?, you are unnecessarily feeding the brokerage houses in the form of paying transactions levy, this behavioral investing will not harness you any longer as the bull run at the CSE had long vanished, going behind the penny stocks (stocks have smaller price, often considered  less than Rs 10/=) also one of the form of this type of buying and selling behavior, if you wish your hard earned money to be safer then don’t indulge yourself with these outdated strategies, instead look for above mentioned method, and always ask information/research reports from your broker house but do not solely depend on their buy/sell report, do your own home work, monitor the market day in and day out, familiarize yourself with the prevailing trend at the CSE and once you feel comfortable enough of sailing in the sea which has some dangerous sharks and other creatures, then jump into the bourse without reservations.

Conclusion

There are ample of other strategies/methods can be found by doing few Google searches, but be mindful not all the formulas will work for a particular problem, so winning art is lying on selecting the best method out of a lot. Wish all the investors Happy investing ahead and if you have any queries revert to me I will try my best to answer you, if not, then there are always cost free professors around us namely Mr.Google and Mr.Investopedia  you can help yourself by knocking over them.

Disclaimer: - These are writings done from my knowldge over CSE and its attributes. This cannot be taken as assertion nor recommendation of particular or range of investment strategies by any mean.

Photo credits :- Google image search results.

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