If you cannot write the
reasons you are buying a stock for, then do not buy it. I was
referring to simple notes made a few years back (August 2011) when we bought a
consumer stock with idealistic brand value. The personal note said that the
company is growing and poised to grow at >25% for several years and its
brand is desirable by millions of Indians. It’s a relatively new company
with passionate promoters in an old industry that will never change, the trends
of consumerism is driving its markets bigger. We then checked
discounted cash flow and other financial metrics to
consider valuations to make a BUY decision. The stock was then
2200 but had appreciated multifold already, almost 8 times in the previous 4
years when we bought. To the many I discussed this stock with, it had already
appreciated 8 times leaving no headroom. this is a common mistake our brains
will do, comparing with the past than what is possible. Behavioral scientists
attribute the reason for this; we are bad at estimating future prospects so we
compare with the past which makes it easy.
In the above example
it was easy to look at the fact that it had run up very fast and made people
believe they lost out on the opportunity and the risks are high. What
was difficult was to analyze future prospects of the industry, the financial
metrics as this required effort and a lot of work to be put in. We miss
many opportunities due to improper comparison. Here the tendency
to compare with past than what is possible. Comparison changes the value
of things as a Harvard psychologist
Dan Gilbert puts it. To loosely translate
his example, if a great company that you believe in goes through a price
correction from 9500 to 8000, you call it cheap. But if I tell you that it has
moved already now to 8800, you will say it is expensive. Gilbert says 'our beliefs about what will make us happy are often wrong'. He gives an example of how you would decide between two
options of getting Rs 10,000 today and Rs 11,000 after a month. Now if you are
given an option of getting 10,000 after 12 months and Rs 11,000 after 13
months, you may change your decision although the situation has not changed
considerably. Our brains are developed to decide from fewer choices, if
the situation gets complex we behave irrationally.
In the investing
world, it is paramount to be aware of our brain's limitations and therefore be disciplined & trust a process
than our instincts.
On teacher's day I got
to listen to PM Modi speak. To a student's question whether he aspired or
ever imagined that he would become PM some day, he said he never did, he was
never even a class leader . He only wanted to work with absolute sincerity. He
never wanted to become ‘someone’. He exhorted students to work with dedication while
enjoying what they do and that will make them someone in the path. Such a great
lesson it is.
There is so much truth
in it for us and as investors there are obvious lessons too. Look for companies
managed by leaders with dedication and sense of purpose; they will go on to
deliver the best for shareholders.
Like
in life, not all companies are created equal. I heard ‘nobody makes wealth from
salary; it’s from how they invest what they save’. Move from a pay check
mentality to net worth mentality.
Knowledge is wealth :The business that will grow at 25%; email ram@learninvest.in
