Psychological factors involved in Value Investing


"Stomach is the key organ here. It's not the brain" - Peter Lynch


The Hindu Businessline (an Indian financial daily) carried an article titled "Big Losers of 2011" on 25-Dec-2011. This was a list, compiled from CNX 500 listed stocks in India, included GTL, Jai Balaji Industries, ARSS Infra, KS Oils, Lanco Infratech, SKS Microfinance, Karuturi Global, GTL Infra and Sujana Towers. The 2011 losses ranged from -92% to -79%. Some of the cited reasons for the mighty falls - high debt, regulatory issues, governance concerns, management disputes, legal tangles and geopolitical problems. An additional but equally important reason not mentioned is - investor emotions. It is highly likely some of the above reasons would be valid even a few months ago when these stocks were quoting at higher prices. Now, because of the market fall, investors suddenly "felt" these reasons more strongly.

The same article quoted that some participants "hold the view that some of the worst performers this year may have suffered a permanent de-rating". IMHO, it is early and difficult to say if they are going to remain where they have fallen.  If they have poor fundamentals, they have fallen rightly so (because the market is finally valuing them for what they are worth). If the problems they face are of a temporary nature and the management makes a turnaround, they might rebound. I am not saying they will rebound, I am only saying we can't for sure whether they will stay fallen or rebound.

Also, one suggestion proferred was "shifting to stocks of companies which are cash-rich, offering good dividends and earnings record". Now, truly Intelligent Investors would do that always - not only when the market falls/when notional losses are seen in the portfolio. Also, they should check if they analyzed and purchased stocks of any of the above companies. If they did so, they should re-evaluate the criteria (that led to the original purchase) are still valid. If the basis is sound, there is no cause for concern. More so, value investors would now take a rational look and analyze these companies and see if they are ripe for a purchase. BTW, I hold shares of one of these companies - Allied Digital. I will explain in a later post the basis on which I purchased and if the basis still holds.

Value Investing, especially that of pure-Graham style, needs the investor to have very strong guts. It requires going after little known companies. Mostly, you would have not heard of them and many of they might already be drenched in pessimism. Many of the stocks that I purchased in the last one year, I did not even hear of them before. Some of these are - ICSA India, Graphite India, Riddhi Siddhi Gluco Biols, Avaya Global Networks, Zylog Systems, Glodyne Technologies, Ador Welding etc.

Value Investing is difficult because it appears foolish for some time.

Footnote: What hurts me most is - in 2011, I did not identify any of the Top Gainers listed in the same article. These include Amtek India, Alfa Laval India, VST Inds., Gujarat Fluorochem, UTV Software, Bata India, Gitanjali Gems, Tata Coffee, Page Industries, Hexaware Tech.. The returns on these ranged from +186% to +58% in a year when the Sensex fell -25%.

Invictus.

Comments

Post a Comment

Popular posts from this blog

Who is the Greater Fool?

  “If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”  - Warren Buffett "In every trade there is an idiot and if you don't know who it is, it is you" - Meir Statman On Fool's day, let us talk about the Greater Fool Theory. Interesting thing about investing in stocks is that there are always (at least ) two points of view for every trade.  For every person who is buying a stock thinking the price will go up, there is a person on the other side selling the stock. Now, assuming no insider trading and assuming both the parties have exposure to the same information, it is not clear who has the relative advantage? What this augurs for the intelligent investor is that he should buy/sell only if he is clear in his mind and sure of the reasons for doing so. There is a concept called the Greater Fool Theory - this means people purchase a stock with the assumption that they will later be able to sell i...
Read more

Book Review: The Little Book Of Value Investing

This is a very interesting book for all those hooked to Value Investing. I was naturally attracted and I possess the book in both formats (Audio CDs and hard bound book). The book is divided into twenty one chapters, each very small (after all, it is a "little book" ) but enough to drive across the point! On the long history of Value Investing, Christopher Browne explains, Value investing has been around as an investment philosophy since the early 1930s. The principles of value investing were first articulated in 1934 when Benjamin Graham, wrote Security Analysis, the first, and still the best, book on investing . Value investing is explained in two plain sentences - The beauty of value investing is its logical simplicity. It is based on two principles: What's it worth ( intrinsic value ) and don't lose money ( margin of safety ). These concepts were introduced by Benjamin Graham in 1934, and they are as relevant today as they were then (emphasis mine). The t...
Read more

Cementing your portfolio with Kakatiya

Kakatiya Cement Sugar & Industries Ltd. came on my radar and an analysis on the last 10 year data yielded the following results: + Sales increased 1.82 times (92.51 crore to 169 crore) + Current Ratio is 2.72 + Debt Equity Ratio is 0.05 (2011 data) + Net profit increased 4.38 times (5.05 crore to 22.13 crore) + Did not suffer any loss in the last 10 years + EPS increased 4.3 times (6.5 to 29.94), a CAGR of  5.06% + Book Value increased 2.6 times (77.39 to 200.9) + Uninterrupted Dividend for the last 23 years + Promoter Holding is 49.34% There has been a dramatic increase in the latest EPS (5.03 in Mar-2011 to 27.94 in Mar-2012). To smoothen out such fluctuations, I normally take the 3-year average EPS of ending period (2012, 2011 & 2010) and the beginning period (2004, 2003 & 2002). At a CMP of Rs. 79.60, the MoS works out to be 227%. Conclusion: For me, it is a buy, till I reach my diversification target or if falls out of...
Read more