The year was 2014. The massive bull run had just begun. A stock which had been garnering a lot of attention was a company in the forging industry. It was available at a low single digit PE multiple. It seemed like the ideal investment opportunity.
Its profit and loss statement was splendid. But, as a novice I didn’t know I should’ve assessed the balance sheet as well.
In retrospect I should’ve resisted the temptation to invest. Doing so would have saved me a lot of financial and emotional turmoil.
Hindsight seldom alleviates troubles. It often worsens the pain, suffering.
Impressed by the neat past performance of the company I invested a decent portion of my portfolio in March, 2014.
Soon after, the stock embarked on an unprecedented rally. The stock price more than tripled in 2 months. I had never witnessed such a meteoric rise. Profits were significant. But, they were unrealised. Pleased by the unrealised, unreal profits I expended some money on unnecessary conveniences. Now, I realise how naive I was and still am. From May to August in 2014 the stock underwent a correction. I was patient and held on to my shares.
As expected, the weakness ended soon and the stock commenced another tremendous upward journey.
August onwards the stock movement was almost linear. By November, the stock had risen by almost 400% in 6-7 months.
My unrealised gains were 335%. How juvenile of me to consider unrealised gains as mine. Unrealised gains belong to the market. Its subservient to the market’s whims and fancies.
As always, every good thing has to end. Post November, the stock began correcting.
But, the downward movement was characterised by steep falls- Very similar to its ascent.
In 4 months, by April, the stock had halved. But, I wasn’t too worried. I had a decent gain despite the massive fall of 50%.
In the next 3 months, the stock halved again. Now, the share price was close to my acquisition price. In the meanwhile, quarterly results were worsening. It warranted concern.
But, the management assured that the company was functioning well. Claims were made that the company ‘fundamentals’ were strong.
I placed my faith in them.
I wanted to exit the stock and preserve my capital. But, my mind was anchored to the peak price. Hence, I stay put.
Much to my chagrin the stock halved again in the next 2 months. I was devastated. Overwhelmed with grief.
I was staring at a 50% loss. From a profit of 335% to a loss of 50%. As I mentioned above, unrealised gains don’t belong to us.
It was a tumultuous stretch. I was contemplating averaging my holdings. But then, I received good advice from a fine human being.
What was the advice?
1)Never put good money after bad
2) Don’t be a victim of the sunk cost fallacy.
3) Don’t look at your cost price.
Evaluate the stock at its current price. Would you invest now if you didn’t have previous investments in the stock ? Don’t let the past influence your present action.
I was in agreement with the advice I received. But, it was difficult for me to survive this tremendous wealth erosion.
As a beginner, what baffled me was the dissonance between management commentary and financial performance of the company.
It was important for me to book my losses, learn a lesson and move on. But, I didn’t have the heart to do so. Somewhere I believed, that a turnaround would be scripted and the stock would regain it’s past glory.
Did it happen?
Unsurprisingly, No. The stock price halved again. The stock was reduced to 1/10th of its peak price.
I had to write off the investment.
Come to think of it, the company was in a precarious financial position. A massive debt obligation and ballooning expenses. There was no reason for the enormous share price appreciation. I should’ve book my profits.
But, then, I was a victim of greed.
Who has been able to resist the lure of making more profits?
What did I learn?
- Take everything the management says with not only a grain, but a bagful of salt.
Their projections are more often than not aggressive. Make the requisite conservative adjustments.
- What goes up without a reason will come down without a reason.
- If need be, book your losses.
- Don’t make a decision with a sight on the acquisition price. Consider the present scenario and decide. It may have to be a difficult decision. But, doing so, will be beneficial in the long run.
Even today, I’m in possession of a token amount of shares- To remind me of my gullibility, imprudent actions.
I stare at a loss of 80%. But, I’ve accepted it and learned a lesson for life. I hope I can take better decisions in the future.