This was my reaction to a statement made by an acquaintance of mine who was discussing how a particular stock has acted after his purchase in huge numbers. That particular stock is now close to 15% of his portfolio and the concern was valid but the reasoning was not.
If you are a “Value Guy”, as they say on the street, and you love looking for bargains and proverbial ‘dollars for cents’, I can bet you had at least one experience where you felt bad or even foolish to buy a stock and see it going further down for day and days (this kind of feeling is more prevalent in people in the initial phase of their practice).
And then, you choose one of the two things:
1: You decide to curse yourself for this ‘mistake’ and sell the stock.
2: You decide to hold on to the stock with the I-will-sell-it-at-my-buying-price reasoning.
Even though Gordon Gekko told us not to be emotional about the stocks, we can’t help it and want to see it go up from the day we decided to buy the stock and why not, we did the hard work and studied the reports and looked and all ratios (P/E, P/BV etc) and concluded that it’s an undervalue stock and we buy it and whoa!!! It’s going further down…!!!
But we forget one small thing: Stock doesn’t know we own it (else it would have willingly complied, I am sure!!!)
A stock trades at low multiples for a variety of reasons. The industry it belongs to may be going through a tough time or there are structural changes in the economics of the business that makes it less attractive or even if everything is good, the promoters have the tendency to destroy value for shareholders and so on … Hundreds of reason for it to trade low… The key is to identify which of them are justified reasons and which of them are not. The market is the ‘temple of Capitalism’ and it deserves respect because of its ability to correct itself.
Now if you have identified the factors and made the right judgment about the value of the stock, isn’t it obvious that the very same factors for which you have identified the stock are not going to change the moment you decide to buy the stock. Why is then their urge to log on to moneycontol.com or CNBC to check the prices after every minute or day or even months?
In the arena of investments your biggest competitor is you. As Buffett and other successful money managers rightly point out: The success in investment industry has nothing to do with IQ but have everything to with discipline. This form of investing needs patience and eventually the powerful forces of capitalism will do justice to the price of the stock.
So be patient and wait for the factors to change in your favor. If you are right, you will be rewarded. Of course, there is always a possibility of a mistake in judgment and hence you have to relentlessly and constantly upgrade your knowledge and understanding. You may just realize some mistake like buying a undervalued stock in a overvalued market or buying a value trap or something about the economics of business which you missed earlier and has a drastic impact on the value of business and so on. And when you do find your mistake, please swallow your ego and pride and rationalizing tendencies and sell the stock. The bigger mistake than making a bad investment is to hold on to that investment.
Happy Investing !!!