Digest this! The
risk in holding a stock that can virtually go down to zero is lesser than the
risk of selling a winner too early. I realized this when Rakesh ran a few
numbers to me. He had invested in Suzlon and Ultratech cements in the December 2008.
Suzlon ran down from its 2008 highs of 62 to 25 now and Rakesh lost 60% of his
investment. He had also bought Ultratech cements at 366 at the same time but
sold it 2 months later after it appreciated by 20% to Rs. 439. He displayed a
very normal behavior of holding on to the loosing stock but selling a winner.
He holds the suzlon stock even now which is quoting at around 25 unable to
accept the loss. He is hoping it will regain its original purchase price and he
could avert a loss.
The biggest folly
that leads to investing failure is not about holding on to a looser, but the
selling off a winner. On one hand Rakesh held on to Suzlon hoping some day he will
be able to pare the loss, on the other hand he sold Ultratech cement after it
appreciated a meager 20%. Imagine a different scenario: Rakesh had held on to
both the stocks until now, and that he had invested a similar amount of Rs. 1
lakh in each of them, his Rs. 2 lakhs investment would have now have become Rs.
Rs 5.60 lakhs. (1 lakh invested in
suzlon would now be Rs 40,000 while Rs 1 lakh invested in Ultratech would have become
Rs 5.4 Lakhs). This is a return of (cagr) 26% pa over 4 years. This is better
than inflation. Imagine you virtually held on to a looser that has dented your
pride, yet your action of holding on to a gainer would have more than
compensated for the losses.
Rakesh was
influenced by analyst’s definition of cyclical stocks and sold the cement stock
expecting a glut in the industry to hamper growth prospects of Ultratech. And
he reasoned the he could buy it cheaper later. The market is filled with very knowledgeable
people who can define every situation and put a reason and logic to everything
they have to say. The best time to sell a stock is 'never' as long as the
company shows predictable earnings growth over long term.
Short term
fluctuation must be ignored as long as the company is run by trusted management
and the business has long term growth prospects. The risk of selling a winner
far outweighs the risk of holding on to a looser. Hence it is wiser to hold and
be proven wrong. A stock can only get to zero on the downside but technically
there is no limit to how high it can go. Do not get swayed by stereotype
definition of when to buy, when to sell. Experts can christen their style and
call them such as earning or growth generator, contra strategy, special
situations, mutlibagger ideas etc. These are traps for a small investor. Invest
for the long term in companies managed by trusted people, who have displayed
legendary commitments, where the industry has long term prospects and businesses
have an irreplaceable value, provided you buy them cheap. Rakesh should have
continued to hold his Ultratech cements, business that are subject to low rate
of change. Cement is a mundane product that everyone needs subject to slow rate
of change, as the legendary investor said, change is the enemy of investor.
People will always buy cooker, under garments,
financial services, cement, loans unless something terribly goes wrong. There
is always the risk of unknown; we could face a period of prolonged recession. Risks
are real, depressions are friends of investors. If you get a chance, buy distressed
businesses in a distressed industry. Eventually markets will catch up with the
true value of the business.
