The twelve most silliest things people say about stock prices
As I have mentioned earlier in my blog post, I have been reading ‘One up on Wall Street’. The book is a must read for people interested in value investing.
Peter Lynch brings to us his experience and packs with a punch of humor, wisdom, timeless principles and wonderful examples of all kinds of businesses. Towards the end, there is a chapter on 12 silliest things that people say about stock prices with examples of US Stocks.
I could relate so many similar examples from the Indian Stock markets and so this post and my thoughts are on the 12 silliest things (& most dangerous) things, which people say about stock markets.
I will bring this in 3 parts… Part I is here. Have fun. It is eye opening
1. If it’s gone down this much, it can’t go further down
I’d bet the shareholders of Satyam (now Mahindra Satyam), Suzlon, Reliance Communication (RCOM), Reliance Power (Rpower), DLF etc were repeating this phrase just after the stocks kept dropping. The phrases which people use are “I am a long term investor”, “You have to be patient in stock markets”, “These are blue chip companies”. During the unraveling of the Satyam scam the shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. Investors purchased at various levels on the stocks way down.
There is simply no rule hat tells you how low a stock can go in principle
2. You can always tell when a stock hit bottom
Peter Lynch says ~ Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. LOL
RCOM (and many other erstwhile super stocks with weak fundamentals) bottom was never successfully found by investors. Over the past 4 years these stock has successfully managed to do create only new bottoms.
If it is a turnaround story, then there has to be a solid reason to pick a stock. For eg: the balance sheet shows Rs 50 as Cash per share and the stock trades at Rs 53. Even then, the author mentions that the stock might take years to pick up steam.
3. If it’s gone this already, how can it possibly go higher?
This is one of the favorites of the analysts who frequent the News Channels. However consider the stocks like Asian Paints, Titan Industries, Page Industries, Hawkins Cooker , Trent Industries or Pidilite Industries etc. These stocks have strong fundamentals and strong earnings & profit growth. They continue to beat the markets quarter on quarter. The fundamentals catch up with the price and so the market values them slightly higher than the rest.
Many investors do make the mistake of parting away with the stock just when a strong uptrend in underway. In reality successful stock investing is & should be a boring activity. However investors go in for action in the hopes of getting the stock at a lower price. Unfortunately, in case of fundamental stocks, that never happens. Recently, Hindustan Unilever has moved from 350 to almost 500+. Many investors whom I know have already parted with the stock at 400 levels and they are ruing the fact.
4. It’s only Rs 3 a share: What can I possibly lose?
How many times have you heard people say this? People assume that buying a Rs 8 share is less riskier than buying a Rs 50 stock.
Case in point .. Kingfisher airlines, Indowing Energy, Sujana Towers, Moser Baer etc. All these high flying stock of 2007 Boom phase are trading in single digits for last 2 years now
The fact of the matter is that whether the stock costs Rs 50 or Rs 5, if it goes to zero you still lose everything. If it drops to 50 paise, the results are only slightly differen
The investor who buys at Rs 50 loses 99% wheras the investor who buys at Rs 3 loses 83% ~ hardly a consolation. Lousy cheap stock is just as risky as lousy expensive stock if it goes down. So investing in a Rs 50 stock or Rs 3 stock does not matter. The reason for buying the stock should be based on the fundamentals of the company.
.. Read Part II & Part III