Everybody thinks only his stock is not rallying, Fear of Missing out

Q&A: Questions & Answers
1

Hi Folks,

In this kind of massive Bull run, the one problem most of us or new value investors face ( esp those who check their PF daily, some even hourly) is the fear of missing out.

This is completely a behavarial skill which some of us need to develop over a period of time, esp duringfurious bull market. When we see mkt rallying hard, all stocks rising fast but, your own stock is not rallying, with same rate. That is where I wanted to start this thread to help each other mutually.

This is where this VP community and learning from each other become all the more important. As we have read in many books, many big interviews, that successful investing is not only stock picking, ppl say that is only 20 %, 80 % is sitting with the stocks, when your conviction is being tested.

In one of the posts, I recall Donald has summed up this really well, that stick to your own conviction stocks and dont get overly worried as too many other ideas/new ideas will be floating evrywhere and one tends to obviously compare and switch frequently and become a trader from long term investor.

Request some really good inputs from senior VP guys on improving this skill and wisdom so to say. A lot has been written on VP and can be read also. But I think we are enetring a new phase of this Bull market where this becomes further more important as all boats are rising, that too v v fast .

All comments are welcome ! we can help each other while discussing and rediscussing time and again.

2

My 2 cents.

Switching stock is a costly affair by and large. Selling your quality stock and buying stocks which are hitting 52 weeks high (without bothering to know their fundamentals) is a sure-shot way to loose money. You will know the outcome pretty soon, when your pf will fall 2-3 times the sensex’s minor fall (this has happened in recent minor correction to some investor friends I know).

But, at the same time, one should be always open to new and changing realities (be it macro, politics, international relation, or commodity price fall) and suitably change his portfolio to get benefit from the same. Turnarounds are also opportunities that comes more frequently than quality core stocks.

The trick lies in balancing between these two. I personally have solved this riddle by mentally divining my pf in 2 section. 80% of my pf is what I call my core stock (some 8-10 stocks, which I have done due analysis/research, and is ready to add more if they fall).

The fun part is the rest 20% of my pf, which I call the non-core part. Here I bet on lesser-researched, but still promising looking, 52-week high hitting, stocks. I have 20+ stocks in this section (usually each less that 1-2% of pf). What i do is I take small initial position in these, and do upward averaging (which has its own risk, mind it !!!). I do it till I am comfortable with the fundamentals, and I see the macro/turnaround getting played out nicely. I dont average on downside usually in these stocks.

The beauty of this approach lies in the fact that I am letting my irrational brain play its game in 20% of the pf (leaving 80% compound at its own pace!!!). The second benefit is I can invest in stocks which I haven’t done much research, or have low conviction, or part of “macro-themed basket”. The 3rd benefit lies in the fact that good stocks are automatically getting higher allocation (as they rise in their price). The 4th benefit I see is that sometimes, few of these stocks become core-stocks as they rise way faster than the rest.

Agree to the fact that, this might not be the most optimal strategy. But it seems to work nicely in this bull market so far :stuck_out_tongue:

3

There are many approaches to investing, so I think you have to do what suits you and your personality the best. Some of my stocks have gone upto 400% in the last few months, and franklyI cannot justify their lofty price even though some of them keep going up. It’s not that the company is not good, and it’s also not a fear of a crash and wiping out my gains (loss aversion).

It’s a simple logic that at this price I cannot justify the risk/reward ratio. As a value investor, you want to be in a position where the risks are asymmetric, i.e. upside risk is far higher than downside risk. Since this is not the case for my stocks anymore, I have started to sell off some of my positions. I am sure many long-term investors will disagree. But like I said, it’s upto you and what suits your trading style.

If you feel that the high price is justified and that they will continue going up, that might be right for you, but note that you have now become a growth investor as opposed to a value investor. I’ve played the growth investing game in my past life and frankly, I’ve always lost. Growth investing doesn’t suit my personality.

Bottom line, don’t fool yourself, stick with your system and don’t be greedy. Figure out what works for you and make sure you sleep peacefully at night.

4

Another very simple but difficult to implement idea would be review and value your portfolio only once a quarter, once six months is even better. This will allow you to avoid everyday lows and highs (noise)

On the other hand continue your work on identifying opportunities and trust me a day will come when you will able to pull the trigger and get in the game

5

@vivek bothra :: reviewing valuation of pf once in 3/6 months is not a good strategy either as per me. There are few major issues here. 1> We are not so good a valuing company as we wish (over-confidence bias), 2> Valuation is way complex that we wish (will try to explain some of it in next paragraph), 3> You will miss multibaggers in your pursuit. Read Basant Maheswari’s book “The Thoughtful Investor”, on how he ride on these multibagger one after another.

@Shan :: Now to the valuation part, and the excel sheet based modelling flaws:-

From DCF model: Price = sum of discounted value of future earnings. You value you co, using a assumed growth rate, and amused discounting rate, find it over-valued and sell it. In the mean time one bearded guy name “NaMo” came and started in his ambitious project of “make-in-india”, implemented reform one after another, and tried improving “ease of doing business” ranking of india from 140 odd to 50.

In the mean time, much to the dismay of Russia/Saudi/Venezuela oil price started crashing, commodity price started reducing worldwide. So inflation reduces, which in turn give RBI the much needed headroom to reduce interest rate, which in turn increase earning, reduce interest of cos, increased people’s spending power, and a positive feedback cycle starts.

This sad sequence of events, will make all your assumption redundant (as the underlying discounted rate got actually reduced, and earning portion actually increased). And your misfortune doesnt ends here. Because of accelerating earning, pe also expands, making your overvalued stock a big time multibagger.

I can name another 3-4 macro stimulus (like stagnating real estate, potential upliftment of india’s rating etc) which will make your excel sheet assumptions looks terribly bad.

The problem doesn’t lies in value investing per-se. It is an excellent strategy, with easy theory, and incredibly difficult practice mode. One diesel price reduction, makes a small reduction in inflation, which increases likelihood of a rate cut, which will change the variable of your excel sheet. So, you need to estimate the required change and incorporate it in excel sheet. It is very very difficult/foolish exercise and hence most awesome investor I know, does not use it.

Look, I have explained everything being within the realm of value investing (never jumped to growth investing wagon).

6

I have started investing in Equity from June-2014. I guess we should track Macros, Technicals and Fundamentals at all times -

Macros and Events -

US Indices - Dow, S&P, Nasdaq (daily movement, shillar, forward, trailing p/e etc)US interest rates & inflation, GDP projections, FED meetings’ dates, Oil prices

Indian National & state elections, Budget, GDP, inflation data (CPI stabilization at 6% before rate cuts), RBI outlook.

Daily FII buy/sell data

Quarterly results of stocks, Other stock specific triggers.

Technicals

Price-volume action, delivery %age, Derivatives action(short,long build up, long unwinding, short covering, OI buildup, put-call ratio etc), Nifty chart, sectoral indices charts, stock charts etc

Fundamentals

Annual reports, earning projections, balance sheet, P/L statement, cash flows, Net Debt-Equity ratio, Div. yield, P/E, P/Bv, RoE, Management commentary, promoter holding, pledges, Moats, Management ethics, cloning

Sites like screener.in, moneycontrol, dalal-street, valuepickr, researchbytes, profit.ndtv.com etc

Nifty is trading at arnd 21.7 trailing p/e currently (as on 2nd Nov). We are in expensive zone I guess.

7

The strategy I am trying to follow is fewer bets, bigger bets, buy right, sit tight approcah. During this period I try to further increase my conviction by further reasearching on my bets ( being aware/careful of over analysing).

Finally it comes down to the fact that how high the conviction isat the first place and has it further increased or decreased over a period of holding time. It is also important to observe from a distance that whether my convition is price dependant or not ? I deally it should not be. If price is going down, conviction should not comedown or vice versa . In fact if convition is v high price going downshould bea good news.

I do agree all this is easier said than done, that is where this forum is really useful in mutually learning and helping each other in this fantastic journey of evolving as a prudent and long term investor.

8

@Subash thanks for the response. BTW, I never mentioned DCF and I don’t follow it anyway. However, I don’t have anything against those who use it.

Anyway, the point I was trying to make is that you should have your own investment philosophy which suits your personality and stick with it. I have a lot of respect for Mr Maheshwari and he certainly deserves the wealth he has created. However, his investing style does not suit me, so I don’t try and follow his style.

Bottomline is that if you started investing in the stocks with one philosophy, and then just because they’ve run up sharply, you change your philosophy, then you are only fooling yourself. When I said I sold off my holdings, it doesn’t mean I am sitting in cash, I have moved over to other stocks which suit my philosophy.

To each his own, learn from everyone, but practice only what suits you.

9

@Shan, I thought the cornerstone of value investing lies in ability to value a company, and folks usually use DCF to value company. Once to value a company, than you determine margin of safety, and than you do value investing.

Bottomline is that if you just invest in stocks just because it has gone up, you are fooling yourself, and are destined to get hit badly. But, it is smart to accept the new realities of better/worse future depending upon prevailing macro scenario, and than value the companies suitably.

My point is that the valuation of a co cant be same in these 2 cases.

A> Unstable, corrupt, inefficient, left-leaning, business unfriendly govt, with unfavorable macro scenarios (like high crude price, global slowdown).

B> Stable, right-leaning, business-friendly, reform-oriented govt, with a favorable macro scenario (like end of commodity super-cycle).

My philosophy is to be smart, and understand new realities, rather than to have a static approach to investing.

10

@Subash, I dont have any bias to any sides. But what I feel is irrespective of the govt policies, business cycles are must and good companies provide bad returns in your case B too.

Companies cant provide great returns for ever(few exceptions though). A time will come for them to slow down. If it continues to do well beyond reach we call it a burst and say there is slow down and stuff like that.A slow down is caused just because there was a boom.

A real Boom is a case when a common man also wants to buy stocks instead of a pair of shoe or AC or TV etc. Obviously in such a case business (product demand) will slow down and stock prices will shoot up followed by a stock market crash.

Having said that VP stocks it self had great run in the last few years ( might be case A)

Valuation of companies may depend on the 1)EPS 2) Demand and supply.

Cycles ( below cases) depends on the Valuations but not vice versa.

my 2 cents… feel free to correct, if any.

11

We have seen lot of speculative corruption in spectrum cases etc, but not sure where all the money went as there is no company gained in the telecom sector.

12

@Sridhar,

I have never said anything about return. I have asked about valuation (which has no correlation to boom bust cycle). My logic is that the valuation of a co will be different in these 2 scenario.

Demand and Supply effect price, not value. Price and value are supposed to be 2 different thing.

Cycle doesnt depend on value of company. Cycle happens because the price move wildly above/below supposed value of a co (which is due to issue with our brains, not due to fluctuation of value)

13

As the market gathers storm, I think this thread will become v useful to investors likes us, where seniors can give comments on how to ride a long term rally.

As I see there seems to be bying frenzy, panic buying, esp in small cap /mid cap stocks I think it is imp to hold on to your horses, even if your stock is not doing well in short term, we should not try to switch to stocks, which are doing too well ( even though v tempting). Classic evidence in short term is AJanta, where the patience paid and stock in up 70 % in last 2 months.

Pls share your wisedom guys !

14

My take on the current situation:

Bargains are very very hard to find. Everywhere one looks, analysts are giving estimates of 25-30% CAGR estimates for the next 3-4 years and have built this and much more into the stock price.

Most high quality stocks are trading at anywhere between 50-100% premiums over their historical 10 year PE.

NIFTY is trading at 22 times PE which is 20% more than its historical average. The SENSEX has not taken any meaningful corrections in the last months and is constantly making fresh highs.

I believe that this is not the time to be taking a deep plunge and increasing positions. In my opinion this is the time to be patient and hold some cash waiting for Mr. Market to do its trick and throw us some bargains whenever that may be!