Investing Mistake and a List of Value Investors

a)

Q1. What is the first rule that every value investor needs to adhere to?

A1. Invest in stocks which the investor understands and is comfortable with.

Q2. What is the second rule that every value investor follows as a habit?

A2. Run some numbers and see if it is undervalued.

Q3. What happens if a value investor doesn’t adhere to A1 and A2?

A3. He commits an investing mistake – if not in terms of magnitude, but in terms of principle. The act of omission is ok, but the act of commission, in this case, mis-commission is pathetic.

And I am guilty of Q3/A3. The stock was PI Industries. I neither understood the industry nor did I value the stock. But I invested in it. Why? Because a few other investors were extremely bullish on the stock. I got heavily influenced and invested in the stock without checking on valuations (well, I checked P/E, if I want to be generous with myself and it was 12 P/E). I invested around Rs.560/-.

The stock went on to hit Rs. 590/- and then Rs. 620/- within 15 days. I was extremely happy with my investment and congratulated myself on finding a multibagger for the long run without putting in any effort.

And then it dropped. It kept dropping every single day. And with the bear market in 2011, it dropped as far as Rs. 420/-. I had no clue why it was dropping nor did I understand whether I should buy more or sell my position at a loss. I was asking myself a peculiar question – ‘If I put in more money into this stock at Rs.420-430 levels, am I averaging my investment or am I averaging my hope?’. I had not valued the stock and by not understanding the industry, I had no clue of the intrinsic value in the stock. There was no way I could justify that I was averaging my investment. If I put in more money, I was only ‘hoping’ that the stock would bounce back to Rs.500/- levels and then I would get out with a breakeven. But it could drop further (there was no way of knowing) and I would be stuck with a bigger loss. I refrained from putting in more money. I didn’t sell either.

Thankfully, the bull (or whatever) market came along and I sold my position recently at Rs.557/-, a price very close to breakeven (and this is inspite of management not meeting guidance nor having a strong order book). I heaved a sigh of relief. And probably some lessons learnt.

a) I got caught in the wave of ‘influence’ by other investing peers. In fact, most of these peers have made money in this stock by virtue of getting in at a lower price. I didn’t value the stock nor did I understand the industry. What was a ‘low’ or ‘high’ price for me really? Even if it had doubled to Rs.1200/-, I had no clue if I had to sell or hold or buy more.

b) I was definitely caught in the ‘mystique of multibagger’. You know, its a good story for your grandkids. ‘You know kids, there was this stock which I didn’t understand that I invested in and now that one stock paid for all your luxuries. Talk about luck, eh?’. ‘Building castles in the air’ is being too nice here.

c) Loss aversion. I strongly believe in the process/outcome matrix (2×2 matrix). I honestly believe that I was lucky with a bad process and good outcome on this occasion. Most times, that won’t happen (as in, most times, bad outcome results). Even if I was caught in a) and b) traps, a good process would have ensured that I sell at a loss and invest the remaining money in a stock that I understood. But I never did. Resulted in an opportunity loss, considering how my other investments have run up in this market.

d) Laziness. What else can explain the logic of not picking myself up to run some numbers even after I invested in the stock? Nope. It was ‘too hard’ since I couldn’t plug in any decent numbers without understanding the company/industry and that would have taken way too much time and effort. A good process would have ensured ‘boss, if it’s ‘too hard’ then sell the stock and invest in what you understand’. Nope. I thrived on laziness.

Anyway, I am very glad that I sold the stock at very close to break even. This stock might run away from these levels and maybe go 10 times from here, but I don’t care. Somehow, I have never taken fancy to the concept of ‘oh, you should invest in this one – this one is a multibagger’ concept. I have always felt comfortable taking the side of omission rather than commission. PI was the first stock that I deviated from my principles. Thankfully, I haven’t paid heavily. But a lesson learnt strongly. I never want to repeat this mistake again (and boy, this behavioral stuff is hard, very hard).

b) Over the past 1.5 years since I started writing this blog, I have observed that my learning curve has been pretty steep in terms of investing. Through this blog and then Twitter, I have met some super investors and learnt a ton from them. My investing process is much better than what it was 1.5 yrs ago and its all thanks to these investors who have shared/keep sharing their investing ideas, wisdom and investing process with me (and the world in general). If you are new to this blog/value investing in India in general, these investors are pretty much a must-follow (in no particular order, except the first one).

i) Prof. Sanjay Bakshi. Top of the list. Biggest jump in my investing learning due to him. The Guru. Enough said.

ii) Ayush Mittal – Fantastic investor. His blog is ardently followed by many and rightly so. Whatever little I have read about John Neff and little I know about Ayush’s investing picks, their investing styles match very closely. An amazing sense (and art) of picking some great stocks.

iii) Neeraj Marathe – Amazing sense and analytical ability to tell you what’s wrong with some stocks. His mindmap on the Sugar industry had gone viral and so have quite a few posts from his blog. It’s almost like he is teaching you the ABC’s of investing in each of his blogs.

iv) Donald Francis – His investing forum has been golden with a lot of quality investors pitching investing ideas and discussing them. Extremely enthusiastic and thorough in his investing picks and process.

v) Abhishek Basumallick – Crystal clear thought process is what I would term Abhishek’s blog as. Somehow I get the feeling (might be wrong) but this blog’s quite low profile and probably intended that way. But quality of writing, investing process, ideas, thought process – all top-notch.

vi) Amit Arora – His ideas and discussions go viral almost every single time he mentions a stock 🙂 And his blog indicates his focus area – multibaggers. Fantastic stuff on his blog.

vii) Rohit Chauhan – I recollect reading through Rohit’s blog way back in 2006 and dismissing it as yet another blog. Blogging and bull markets were very common then. I was fresh out of college and I was in a bull market. Who cared about value investing, right? Horribly wrong. One of the first investor-blogger, terrific and thorough investing process, widely followed and respected. Need I say anything more?

viii) Ninad Kunder – Special situation investing expert. Again, much like Rohit, starting a investing blog way back. His blogs have helped me develop a special situation framework and checklist. Some of his archives are worth their weight in gold.

ix) Devesh Kayal – A value investor who is gung-ho on consumption stocks and is very good at it. Also follows multiple PE/VC firms focused on the Indian markets (and he keeps you updated on it). He had stopped blogging for a while. He is just coming out of the woods again 🙂

x) Ankur Jain – Ankur, along with Arpit Ranka (who unfortunately doesn’t blog anymore) were one of the first investor-bloggers that I started following actively. What I love about Ankur’s blogs (he started blogging recently again) is the step-jump in thoughts, ideas and conclusions he takes you through as a reader. I am sure there is a ton of research behind each of his blogposts, but the sheer simplicity, learning and insight you get from reading his blogs is wonderful.

xi) Chinmay – Doesn’t blog as frequently as he used to or should have. A hardcore value investor. He will take you through some Graham/Buffett principles through some practical examples. Terrific stuff (do read the archives).

xii) Prabhakar Kudva – If there was ever a hardcore growth investor, Prabhakar Kudva is one. His passion for strong concentration in equities (maybe 3-5 stocks max) and a superior research and mental model process, he is a true Fisher disciple.

xiii) Deepak Shenoy – As much as he wants to convince the world that he is a technical trader, I personally think he has got a great grounding and sense of fundamentals to invest or not invest in a stock 🙂 His charts are legendary as is his ability to simplify and explain complex things in English.

One of the objectives of this blog along with sharing my learnings (successes and failures) was to connect with as many quality investors as possible. I have connected with all of the investors above either through my blog or my twitter handle (@_kirand) and hope to continue to interact with them fruitfully. I hope to connect to many more in the future. Do drop in a line.