Just a look at my phone and all I have been getting today are panic ridden messages from people I know, asking whether they should sell all their holdings and sit on cash to buy when markets improve. And not just amateurs, even people considered investment experts have been spotted singing the same song — Sell now only to buy at a higher price in future.
We will talk later how stupid this sounds and how stupid it actually is. But for now, let’s discuss what drives this behavior.
If there’s one thing that drives the market — It would be fear. Not valuations, not the macroeconomic situation and in India’s case, not even the budget, no matter how thoughtless it is. People buy fearing they will lose out on the gains, people sell fearing they will lose further or lose out on the gains. If there is one thing which stops people from holding on to stocks which will provide multi-bagger returns that they dream of — It’s fear.
Of late, I have been realizing almost everyone is capable of finding a great company at great prices. It’s not really rocket science — You look for a company that has absolutely cheap valuation compared to its fundamentals (In case they don’t have a sustainable moat) or a company with a moat and again, cheap valuation. And then you buy it. And then you sit on it. As simple as that. No one needs an MBA to do this, just basic filtering and reading skills. Everything else that comes afterward, including excel sheets, reduces the return.
The key is what happens after someone does buy. More often than not, the price goes up and then falls down by a dramatic 20–40% after rising 50–75%. This is when the fear of losing out kicks in and people start selling to “Lock-in” profits. And almost invariably, the thought process is that they will buy it again at lower levels.
But then, anchor bias kicks in and a stock, which they bought at, say Rs. 100 but at a PE of 15x, looks expensive at Rs.150 and a PE of 10x. The inability to think in terms of absolute valuation and factor in improved fundamentals cost investors quite a lot. And this is evident not just when people sell, but even when people hold. Almost everyone is always on the lookout for that great new idea, forgetting that the “Great” idea might be just sitting in their portfolio. I have been guilty of the same many a times and have not bought when price was at Rs. 200 but valuation at 4x, while buying the same at Rs. 50 at 8x valuation. Well, it cost me my early retirement. The stock is at Rs.2000 now.
And the stock has lost 50% of its value at least 5 times during the journey.
Coming back to fear, if one wants to bag that multibagger, one has to stomach volatility. Stock prices don’t move in linear fashion. They do nothing for 2–3 years, then rise up by 300% in 2–3 months and then fall again by 40–50%. And then repeat again. And that’s why it’s important to look at fundamentals and if they are improving, add when the stock prices are falling — The divergence is not here to stay. Knowing why we react the way we do when see our stocks in red and then not following on immediate instincts is much more important than finding great stocks.
Investing is simple — if the product is good, you buy when they are on sale. And you don’t sell when you get low price — You don’t become a seller when a sale is going on.
The key to overcoming this fear is to understand your own psychology and then resisting falling prey to it. More often than not, an investor is his own biggest enemy. And one would do well to learn more about biases and why one behaves the way one does rather than reading 100th book on valuation. Remember that multibaggers, like all great things, take time to build, is full of hiccups, but takes only one bad moment to ruin.
Don’t fall prey to that bad moment. Ride out the hiccups.