In an attempt to try and think about an investing conundrum in a clearer way, I have written down my thoughts (sort of a journal) in the note below. Would appreciate thoughts/perspectives.
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I have been thinking of a situation - as value-conscious mid & small-cap investors, we buy companies after extensive research and when they do work out, sell when we think it’s overvalued and end up making, let’s say 3x or 4x over a period of few years. In all likelihood, these stocks go up a further 50%,100% or 200% and that too in a matter of weeks/months. If I was this investor, I would definitely feel like a fool waiting out 5 years for a 3x-4x return and then miss a further 100%, 200% in a matter of weeks/months. This would lead me to think - how do I play the “Greater Fool” game and maximize the selling price each time?
Firstly, what is the “Greater Fool” game? I think a phase of greed, because stock prices are increasingly detached from fundamentals. So in order to win at this game, the next question would be - at what level of greed will the stock reach its top? Certainly a question which cannot be answered?
Even if we find a way to identify the top, what guarantee is there that there will be sufficient liquidity to exit timely? Also, doesn’t this state of mind come in the way of level-headed thinking - an important aspect for success in investing?
As an example, I think it’s fair to say that the probability that an investor in 2011 could correctly predict a Mayur Uniquoters going from a P/E of 7-8x to a P/E of 20x is much higher than predicting where it can go from there? So unless we’ve identified an outlier (and hence would give it a longish rope), the discipline to sell when we think it’s overvalued is important? Else, not much has to go wrong to lose significant amounts of money in such investments (even with a stop-loss?), because they are prone to sharp corrections?
Isn’t this Mr. Market’s ultimate test - to test how firmly investors stand by the core investing principles? Only those who have the discipline to consistently do so are successful across market cycles?