Stocktaking: Mind over matter

As the markets keep getting more expensive, analysts at brokerage house ensure that they keep revising the earnings estimates upwards. Similarly, all comparisons now become selective and one expensive stock will be compared to a more expensive stock. However, the market is in a blind zone — all heads are turned north and every bit of news is interpreted with a positive bias.  Every stock keeps moving up just as you hear some recommendation and you think to yourself: “Missed it this time. Next recommendation from XXX and let me put some money in to it”. This is the classical story that happens every few years.

Forget our valuations. Now the mood is that the US markets are leading the way. Since they have fought of all worries and the Dow is chasing new highs, we also follow them. We will of course de-couple when it is convenient for the analysts to do so. It is very likely that in this phase of the market, most of us would be buying and selling stocks with a view to take advantage of the momentum and the bullishness rather than reasoned out investments.  Valuations are rich, but our minds are more receptive when the noise is all around us. Most of us are happy to make a quick buck and get out. There will be plays where we think we will make upwards of fifty percent in double quick time. Your success or otherwise is dependent on actions of others, including manipulators. Volumes are suddenly happening in stocks that the world seemed to have forgotten.

There are many of us who would own stocks for the only reason that they fell far below our buying price. The present market conditions are the typical one in which we acquire such stocks. We simply start chasing “relative” affordability or valuations and end up owning stocks that would not make it to any good investment short list. Financial and fundamental analysis takes a back seat in these happy market conditions. I will just remind you of a simple math. If you buy a stock at, say, Rs 20 expecting to exit at, say, Rs 25 you are playing for a 25 per cent gain. Ideally you want this to happen in a couple of weeks or less. Let us forget the brokerage and other transaction costs. You ‘spotted’ this stock or a friend told you about it. If you look at the price chart, it was probably closer to Rs 10 less than three months ago. However, your sources are reliable. You buy the stock at Rs 20 and keep holding it. You watch it go to, say Rs 24 in a week or 10 days. You still want one more rupee. The stock then starts to fall and in the next three months it stays in this range between Rs 20 and Rs 25. You lose interest and then suddenly six months down the road, you see the stock is trading at '10.  Now, you have lost 50 per cent on the stock. You now think that you will sell it once it goes back to Rs 20 so that at least you are not ’out of pocket’.

In other words, you are now looking at this stock ’doubling’ or giving you a return of 100 per cent.  Now step back and think. If you are so sure about this happening, should you not be raising your bet manifold? Or is it that you are not sure, but your mind refuses to accept the loss and this stock becomes part of your long-term holding? The key to surviving in this market is to follow strict rules. Keep a stop loss and a maximum holding time limit for these kind of punts in the market. Learn to accept losses as a part of the game you are playing.

You are now in the realm of pure speculation. You are banking on someone following up on your buying so that you can get your exit. You will find that you also seem “wise”. Enough noises about positive happenings, sector changes etc are flowing.  No one will ring a bell at the exact top. After all, it is your money. You have to make choices. Understand where you are at each stage as you lay bets in the stock markets.

(The writer is an independent analyst and can be contacted at balakrishnanr @gmail.com)