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.

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  1. #1 by Jagadeeswaran (@eeswardev) on February 21, 2012 - 12:04 PM

    Good that you brought up this topic. Recent days (esp after so many post about NESCO) i was asking myself the same question, am i learning fellow investors thought process about an investment or am i succumbing to behavioral trap of aping their investment just because so and so gave a good recco?? Thank god sanity prevailed at last 😛
    Thanks for the good list of fellow value investors. I would add tipblog.in also for his clarity of thoughts on dividend based value investing.

  2. #2 by Abhishek on February 21, 2012 - 1:42 PM

    Let me add a few points on this particular example, as I had a very very similar experience with PI. I studied PI, liked what I saw and got it. I followed it for a while and after this quarters results, I got really really bugged and sold nearly 80-90% of my holding (still holding a small fraction to keep it on my radar).

    Your points about being able to value a company or business is critical to an investors success. That is one reason why Buffet keeps harping on the “circle of competence”. Pi, as a business model, is really good. It is in 2 distinctly growing markets which has a significant barrier to entry. The wildcard on this one is that the management seems to lack either integrity or brains – both of which are detrimental to a minority investor’s wealth!!

    Let me give two more examples from my investments, separated by 10 years!

    Example 1 – In 2000, I bought Dr.Morepen (now Morepen Lab) at about Rs 100 (or thereabouts, cant remember exactly). After a few quarters, I figured that the company’s powerpoint presentations and delivered results were poles apart and got rid of the stock at a small loss. I think I lost 2-3Rs per share. I checked the price today and it is Rs 3.90, so I saved about 90% capital loss in a 10 year period, in addition to the opportunity cost.

    Example 2- Last year a fellow investor gave a very strong suggestion to buy Andhra Sugar. I figured that the business may do well, but was beyond my circle of competence as I had no idea what I had to do to track caustic soda and sugar prices.

    It is absolutely critical to have an investment framework that one stocks to. Keep it written down so that you can go through it before you click the Buy button. Also, in my opinion, it is critical to keep a margin of error. Sir John Templeton had approximately 6 out of 10 profitable investments, and he is in the Hall of Fame of investors! So, we should be planning for a poorer average.

    I am a mid and small cap investor and for someone like me, I know I will make my share of mistakes. So, what I try to relentlessly focus on is make my winners big and cut out my mistakes as quickly and ruthlessly as possible.

  3. #3 by Kiran on February 21, 2012 - 9:19 PM

    @Eeswar – I don’t know what you are talking about. NESCO is up 40% from the time of their recommendation 😛 (I invested in NESCO way back in April 2011 though).
    I think you should start blogging too. Twitter is too small a forum to discuss your ideas 🙂

    @Abhishek – 100% agree to what you said. The only stuff I can add is that one can make efforts to expand his/her ‘circle of competence’ by reading stuff and checking with other investors who have understanding of that industry (I did neither and was still invested in PI – which is pathetic, to say the least) .

    Morepen – wow, scary! Great example to highlight that we always have to check whether the numbers walk the talk of the management.

    I agree with mistakes part too. But as long as I understood what the stock was about before investing, I actually don’t mind that investment being a mistake. I hate committing dumb mistakes like my investment in PI, that is all.

  4. #4 by Abhishek on February 21, 2012 - 11:51 PM

    @Kiran: Whenever I have lost money in the stock market I have always considered that I have learned something. If I have lost money (in this case I did not lose money), I have gained experience, so that the money really was a tuition fee. It would be a shame if I lose both money and the experience.

    Another thing that I do is, when I make any mistake or when I learn something new, I add to my checklist that I look at before making a buy/sell in the future.

  5. #5 by Abhinandan on February 22, 2012 - 6:52 PM

    As I said in my tweet, the stock market is a wonderful teacher. Expensive. Harsh also, perhaps. But a teacher, nonetheless!

    I like your lists, be it of books or investors (as in this latest post…I know/have met with/spoken to some – such as Sanjay B).

    May the learnings continue — would like them to become increasingly inexpensive though 🙂

  6. #6 by Kiran on February 22, 2012 - 8:35 PM

    @Abhishek – That adding to checklist is a great process to follow. I am adding this to my checklist of ‘consciously learn these processes’. Thanks for the tip.

    @Abhinandan – Whether we like it or not, the market teaches us lessons. Thanks for your appreciation. My take is, if you are in it and conscious of not losing money, the learnings will continue.

  7. #7 by Mahendra on February 22, 2012 - 9:43 PM

    Hi Kiran,
    I like your blog and rally impressed with content quality improvement in last one year . Your blog shows that you put lot of efforts ,investor like me get benefited from it.

    It would be very nice and kind if you give use 3-4 example where you follow A1 and A2 (stocks which the you understands) and come to intrinsic value . If It is more than market cap then we can wait else will consider for investment . Basically I would like to know, how can we understand company and sector and come to some intrinsic value as you mentioned.

  8. #8 by Kiran on February 23, 2012 - 5:20 PM

    @Mahendra – Thanks for your appreciation.

    I don’t know when I would be writing about intrinsic value calculation and I don’t want to keep you waiting either. For some reason (and my observation voer time), Geoff’s investing style and mine match quite closely. So here’s a post where he enlightens his readers on intrinsic value calculation (and I wholeheartedly agree with him except for the statement he makes on EV) – http://www.gurufocus.com/news/162794/how-do-you-estimate-a-stocks-intrinsic-value

    Hope that helps.

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  1. Numbers don’t lie! | Quest for Value

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