Why stock prices decline when you buy and increase when you sell ?

Is there any logical explanation to this? I think there is – checkout if it makes sense.

I am confident that this is one topic that all of us can relate to.

There is no bigger mystery in the stock markets

God always seems to have a special eye on us and our activities, so that

  • when we buy –  he orders the price to decline; and
  • when we sell – he orders it to increase

Or maybe, stock market is all rigged and is a well organized play by some large institutions to loot retail 🙂

The result – we miss on the identified multi-beggars and keep investing in the duds !

Neither God has time for our stock market endeavors and nor is stock market rigged or an organized loot by the large institutions

Institutions and their fund managers/ analysts are also affected by this phenomenon albeit maybe at a little lesser level. Reason – they are more disciplined and follow a defined strategy.

So what exactly is the issue? Why does it happen? and why does it happen only to me?

Over years, I have asked these questions to myself multiple times and continue to do so.

  • Bought Bajaj Holding early, share didn’t do anything till I was invested. Got frustrated and exited. Since then the stock has not looked back. Similar was the case with Bajaj Finance.
  • Invested In Jyothy Labs and the share has grossly under performed since I invested almost 2.5 yrs back.
  • Other examples include PGHH, Akzo Nobel, Radico Khaitan, KEI Industries and I can keep rattling the names…

When I looked back, tried to study my experiences as well as reflected back on the discussions with my friends who complained of similar phenomenon, a pattern started emerging… and hence this post.

Following are my observations on the subject –

1. Value buying nowhere ensures exact bottom pick

A value buyer buys a stock when he believes that it is available at a significant discount to the fair value.

It’s relative and not absolute, though a value buyer wants to believe it otherwise

So when Yes Bank, ITC, PSU Banks, Vodafone Idea or say Tata Motors started falling, value buyers started coming in at every lower level believing what they wanted to believe. The market doesn’t work that way and a stock in strong downward momentum doesn’t stop falling because you or I have started buying.

Result – Price declines further after we buy.

Lesson – value determination is an art and not a science so be thorough with your work and still be ready to be surprised. It’s very difficult to catch a falling knife. Value buying requires tremendous patience and one needs to keep his eyes open for any new information and improvise accordingly.

As they say value lies in the eyes of a beholder !

and in the context of stocks markets, it’s about what majority believes and not any single individual like you or me.

2. Bad buying point in an uptrending stock

Over years, I have realized that a typical multi bagger goes through the following phases of perception…

Ignorance    ->  Disbelief   ->  Under Watch  ->  Acceptance  ->  FOMO

e.g., Aarti Drugs, Laurus Labs, Avanti Feeds, Borosil Renewables, Adani Green etc etc etc

Ignorance: Not many people are aware about the stock or the story

Disbelief: Stock has started moving quickly but majority ignore it as normal market/ operator driven move

Under Watch: Stock continues to move up and starts catching attention of media and public at large. Many start analyzing it.

Acceptance: There is a widespread acceptance that the story is good and can be the next big thing

FOMO: Majority get desperate and are waiting for the correction to enter

And here is the problem. Most of the 1st stage movement happens in the stock from Ignorance to Acceptance. During this phase, the majority is not confident to buy.

  • When the stock is increasing – every price looks high;
  • When it’s stable or declining – it seems the move is over

When FOMO happens, even a minor correction is bought into and that’s when the 1st stage investors start making an exit and the prices keep declining.

Result – Price declines after we buy.

Lesson – While chasing high performing stocks don’t lose the focus on overall basics including the valuations, MF buying, management quality, quarterly results etc. There is no point in buying a stock if it has run up its course on these parameters. Sooner or later the realty will set in and it will become just like hundreds of many other stocks. However, if it’s a strong Company, the 2nd stage of up move will start sooner or later and one just needs to sit through – strong Companies don’t get finished with just one up move.

3. Institutions unlike retail can not buy whatever they want at one go

This is especially true for small and midcap stocks.

Indian markets are extremely shallow and sometimes it takes months for institutions to accumulate the quantity they want.

The activity is called market making and is done by brokerage houses that create volatility in the underlying stock to accumulate the required quantity. Therefore, the stock is bound to play yo-yo and sometimes for elongated period and we as retail investors feel that God doesn’t like us.

Result – Price declines after we buy.

Lesson – Pateince, patience, patience. Look closely at volumes and the underlying dynamics and if everything seems to be in order, don’t get jittery if the price declines after buying. One just needs to hold through.

4. Joy of recovering capital from a long time dud

This is most common of all. We invest in a stock backed by full analysis – fundamental or technical doesn’t matter.

Stock initially does move up by 5-10% and we are proud of our analytical skills. However, then the stock suddenly starts correcting and goes below our buying price. Initially we try to average down but soon we lose interest and take comfort by calling ourselves long term investors.

Stock afterwards either doesn’t do anything or keep declining for months and years and we keep sitting – many a times not even tracking it’s price regularly.

Later the stock starts moving up and initially we ignore it. It gradually keeps coming up and is now trading closer to our buying average.

We sell and take comfort that we could atleast recover our capital. But then the stock just doesn’t stop and keep increasing sometimes 3-4 x of our buying price.

We are left with yaadein and a bragging topic to our friends – that we had identified it !

Result – Price increases after we sell

Lesson – Be confident about analytical skill but not timing. Pay a special focus on these kind of cases where stock after decline has come back to the initial buying point. If the analysis continue to suggest hold, leave the past behind and continue to hold. Maybe God has finally heard the prayers and the stock will do what it was supposed to do previously.

5. Selling immediately after the quarterly results

Unlike most others, your Company reports weak quarterly results.

Immediate reaction – story over, exit.

Please remember that quarterly results reflect past and not future. Businesses operate in a dynamic environment and lot many factors (mostly one-offs) can impact them. Raw material prices have increased but finished good prices will increase with a lag, Company incurred higher selling expenses to launch a new product, there was shutdown in one of the factories etc.

Result – Price increases after we sell

Lesson – Don’t just look at headline numbers and give some time to understand the results properly. Listen to management’s explanations through interviews/ management calls. Yes, if it seems there is any structural change/ damage to the overall story one should exit. If not, then hold on.

6. Not every stock can move at the same time. Sectors and stocks move in phases.

This is another very common reason for most of us to sell at the wrong time.

Peer pressure. Our never ending desire to prove our intellectual superiority over our friends or worse… over index

  • We are holding pharma and banking is performing. We shifted to banking and now pharma starts performing.
  • We invested in ICICI Bank and Kotak Bank is performing. We shifted to Kotak and now it reverses.

And the cycle keeps on repeating between the sectors and the stocks.

Result – Price increases after we sell

Lesson – We are not fund managers and are not answerable to anyone. So why to benchmark against our friends or index. Everyone follows a different strategy suiting his own risk aptitude and personality. If a stock is good, it will perform – sooner or later.

I hope you could relate with the observations made above. It’s a complex topic and one just needs to keep improvising.

Undoubtedly we all will still continue making mistakes. However, the lesser they become, the more successful we become !

Some other relevant articles you may want to explore –

Illustration Credit: Vecteezy.com

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Kartik
Kartik
8 months ago

Quite a pertinent question especially in current times. could relate many of the observations made…a very good read as usual.

Arvind Malhotra
Arvind Malhotra
8 months ago

Your observations are pertinent, well written & teach you a lot. Keep it up.

Vivek Vig
Vivek Vig
8 months ago

This is so well written. Great depth. Pertinent. Yet without jargon and humour. Well done!!

Jeewan Garg
Jeewan Garg
8 months ago

Amazing

Ramesh Subramanian
Ramesh Subramanian
8 months ago

Well written. Please also write on ‘how to identify bogus recommendations of stock analysts?

Harinder
Harinder
8 months ago

Just read your post out of curiosity and to educate myself … I am not into trading or stocks as such … But found it very insightful, and, when someone seasoned like you writes from experience, it comes out with all nuances nicely explained and elaborated.

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