Is it a good strategy to buy one stock of Infosys, HUL & HDFC Bank per month?
Many times it becomes difficult to find the right time to enter a stock? Finding whether the company is undervalued or over-valued can be a tedious job.
Obviously, here we are talking about entering into a fundamentally strong company that has a good track record of past performance and fantastic future growth potential. However, valuation is a significant part of investing and should be given utmost importance while making your investment decision.
In this post, we’ll discuss whether it is a good strategy to buy one stock of Infosys, HUL & HDFC Bank per month?
But, before learning further regarding this strategy, let’s quickly analyze the businesses of these three companies mentioned in this post.
A Quick Study of Infosys, HUL & HDFC Bank:
Infosys: It is a leader in the Information Technology Industry. Infosys is the second-largest Indian IT company by 2017 revenues and 596th largest public company in the world concerning revenue. It provides business consulting, information technology and outsourcing services. Currently, the market capitalization of Infosys is Rs 275,866 Crores and has given an amazing return to its shareholders in the past.
HUL is a market leader in the personal care industry. It has a substantially strong brand value with products like Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.
HDFC Bank– HDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets. HDFC Bank provides many products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. Read complete analysis of HDFC Bank here.
Disclaimer: This is not a stock recommendation. The examples used here are just to explain the strategy of monthly investing in diversified stocks. Please research the stock carefully before making any investment decision.
Why can this strategy work?
“A good business is not a good investment if you overpay for it” -Warren Buffett.
What Mr. Buffett simply means is that if you buy a wonderful stock at a high valuation, the chances are that it will fall down to reach its real intrinsic value in future. (At a particular time in future, people will realize the stock’s true worth and the price of the stock will fall to reach its intrinsic value.) Therefore, even a good company doesn’t guarantee a good return if you overpay to purchase that stock.
Nevertheless, this problem of entering stocks at their true price can be avoided by purchasing an equal amount of stocks each month. It’s a fitting idea to invest monthly in diversified stocks. It will help you to avoid the dilemma of timing the market. You’ll be purchasing stocks on both the scenarios- whether the market is up or down.
Suppose a stock is going down week after week. Here, you have studied the stock and know that it’s fundamentally strong and capable of giving great returns in the long term. In such scenario, by consistently buying the stocks every month, you are averaging down the purchase price.
Similarly, if the stock is moving upwards every week, then again there can be few possibilities. Either you don’t buy and miss the opportunity of entering an astounding stock. Or purchase that stock at a high valuation. However, if you plan to invest systematically in that stock, you can avoid both these scenarios. You can make your position in the stock alongside reducing your purchase price by averaging down.
Few Drawbacks of buying this strategy:
Like any other investing strategy, even this strategy is not perfect. Here are the few drawbacks of this strategy to buy one stock of Infosys, HUL & HDFC Bank per month:
Investing in just three stocks cannot be considered a diversified portfolio. Undoubtedly it is better than investing in only one stock. Nevertheless, if you want to reduce the risk, it’s better to invest in at least 4–5 stocks.
You might need to readjust your portfolio in future— Let’s say, one of the stock starts performing exceptionally well compared to the other. Here, the net allocation in that stock will increase significantly, and it might be possible that the distribution of other shares would become too little to affect your overall portfolio. Therefore, here you need to readjust your portfolio (add/sell) in future to make all the stocks equally proportionate to keep your portfolio diversified.
Last and biggest drawback- It’s really difficult to implement this strategy. Would you invest monthly in a stock if it’s price is going down consistently for the last one year? The problem is that people start to lose their patience and confidence (with time) in such scenarios.
To make this strategy work, you need to follow this approach strictly.
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Although investing equal amount monthly in fundamentally strong large-cap stocks seems like a good idea. However, this strategy has few drawbacks as discussed above. Nevertheless, as long as you’re are monitoring your portfolio actively and re-adjusting your portfolio timely, this strategy can help you avoid the problem of timing the market and buying overvalued stocks.
Moreover, this strategy is more useful if you are investing for long-term (+15-20 years). This is because here you have averaged out the extremes (lowest and top-most price) and purchased the stock at a correct averaged price. If the business remains excellent and profitable, this strategy will undoubtedly give great returns to the investors.