Buy and hold good stocks (businesses) for long term. A drop in price should be seen as a friend for accumulating stocks!!

At a time when the market is witnessing a correction and thereby causing nervousness to the investors, this article may open the eyes of many and may change their lives for good forever.

The major part of the article below has been picked up from web. The same clearly mentions as to how one should pick good businesses and follow their performance instead of keeping a daily tab on the stock price. Many investors still judge the company based on the fall and rise of the stock price of the company, while the greatest investors of all time did just the opposite. They followed the price only at the time of buying and selling the scrip.

The article is long, however I would suggest all serious Capital Market participants to read the entire article. The same may change your perception about Investing and make you a better investor.

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One of the most underrated investors around is Charlie Munger. OK, maybe he's not really underrated, but his partner at Berkshire Hathaway -- you know, the famous one, Warren Buffett -- casts a pretty long shadow. So Charlie's own brilliance is often overlooked.

Back to Charlie. He's written that to be truly successful at investing, you need to use many different mental models, from many different areas. He says he has about 80. (No wonder he's so good!)

One of the models Munger follows is that of looking for overall results while ignoring the noise, something helped by expanding the scale. Assuming the data is there, a longer scale means seeing the overall direction of movement without being distracted by the short-term, up-and-down bounce of the data's noise.

It's all about time scale

For instance, this graph.


For this stock price graph, you see that it went nowhere for a few months (that's the time scale) and then declined steadily toward the end. Time to bail, right? Especially after that 50% decline.


Then there's this graph.



you saw this pattern over several months, would you hold? It went down, it seemed to recover, and then it started falling again. Plus, it was bouncing all over the place while doing that. Maybe not.


However, if you expand the scale and take the long view, something Munger does, this is what you get.



The stock, McDonald's in this case, actually went up 140% from July 1, 2001, through July 1, 2008, the time shown (and, after having survived the 2008 crash, is up some 200%). Those two shorter time periods were just part of the noise among the broader, rising signal. About the only part that should have worried investors in McDonald's during that seven-year span was the 50% decline in late 2002. That was when analysts worried that the company's growth was over, which management promptly showed to be groundless.

Take too short a time frame, and what appears to be a signal is actually just noise. As the graph above shows, the signal is the upward movement, the noise is the daily and weekly -- even monthly -- fluctuation.


Beta, beta, who's got the beta?

The amount of fluctuation a stock has, relative to some index -- usually the Sensex and Nifty -- is called beta. And it's a number a lot of people pay very close attention to, because it is supposed to represent risk. After all, if the Sensex drops by 5% in a month and your stock drops by 10% (which is mostly the case with many Penny and Small cap stocks), which you might expect with a beta of 2.0, you're out more money that you would have been had you invested in the index. Except, many companies with high betas can actually be very good investments.


If you like the prospects of any Penny stock or small cap company after having done your research and decide to buy, expect the price to jump around. The betas show they have in the past, and they're likely to do so in the future. But don't worry about it. No less an investor than Peter Lynch commented that most companies' stock fluctuates by 50% in an average year. For the long-term investor, that shouldn't be a concern. What's more important than beta is the soundness of the business. Look for strong balance sheets, growing revenue and net income, and plenty of free cash flow. Beta is nothing more than noise.

In other words, don't pay too much attention to the close-in view, because it doesn't represent the true picture. Fortunes are made by backing up and investing over longer time frames.


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, even monthly fluctuations of the stock price. We search for the next Pantaloons, Educomp, Praj Industries, Biocon of the world, looking to hold them for at least three years.

Multibagger stories do not happen overnight. Companies like Pantaloons, Praj, etc did not grow and became multibaggers in a year or so. These stories have developed and grown over a period of 5-7 years.

People who have made money in the market have all been patient investors (The likes of Charlie Munger, Warrent Buffett, Peter Lynch, Rakesh Jhunjhunwala, Parag Parikh) and have followed the performance of the companies more than their stock price. Mr. Market is not always correct while determining the stock price of a company. Sometimes it can quote a high price while at times a lower price than the intrinsic value. You need to understand the same and take advantage.

So instead of grimacing about the stocks not moving, one should take an advantage and accumulate. Sooner or later the stocks will move up supported by the conducive market sentiments.

Best wishes