Friday, September 4, 2020

Correcting the investment decison matrix

Two inquisitions from readers in past one week have kept my mind occupied for most of the week. The questions are not new; rather these are the most routine questions I get from readers (usually small individual investors). I have answered it many times. But still I keep getting it repeatedly, even from the same people. This makes me wonder why do we investors refuse to learn the art of investing, despite an abundance of wisdom easily available for free on the internet and our own experiences!

The inquisitions were:

(a)   Yes Bank is down more than 95% from its 2018 peak. How much more it can fall? Can I buy this?

(b)   ITC is up more than 40% from its recent lows. Should I buy it or wait for correction?

Well, I cannot comment on stock specific queries. But let me answer it the following way. Please note that this is only for illustration purposes and not an investment advice.

(a)   15yrs ago, Suzlon Energy Limited, a renewable energy major, emerged as one of the top stocks in the country. It was included in Nifty. The promoter appeared on front pages of all magazines as one of the richest persons in the country. He was termed as true visionary and a potential global corporate leader. The stock touched a high of Rs450 (adjusted for all corporate actions) in January 2008, before falling by 50% in next two months. The question was how low it can go. It's already down 50%. It fell 30% from the March 2008 level in next four months. The question was asked again. The stock fell more than 70% from July 2008 level in next four months. In 10months the stock was down over 90% from the January 2008 peak. The question was not even more forceful. 12 years later, the stock is further 90% from the November 2008 level.

Without commenting on the merits or demerits of Suzlon Energy Limited, I just want to highlight that "it's down 50% from top" can never be an argument for buying a stock.

(b)   The stock price of Pidilite was around Rs90 in January 2008. By then it had appreciated close to 100% in 7months. Someone was reluctant to buy it just for this reason. The company was undergoing transformation at that time. The older generation had already paved the way for the new generation. In next five years, it appreciated by over 200%. The question however remained - "it's up so much, should I wait a bit?" In next five years it gained 400% from 2013 level to reach Rs1200 level. To top this, it has gained another 40% in next 2years.

Again, no comments on the merit or demerits of investing in Pidilite. I just want to highlight that "it has already risen so much" can never be an argument against investing in a stock.

 

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