Stock investing is more of an art than science.
Otherwise there would have been some set formula that anyone could have used and succeeded in stock markets.
Fact remains that stock prices are significantly influenced by the human emotions – and hence the artsy nature of equity investing.
It’s impossible to master this aspect of stock investing and one can only hope to continue improvising over period with practice and experience.
One aspect that has majorly helped me in this regard has been…
Asking the question “WHY” – not to anyone else but to myself !
- Why am I buying or selling a particular stock?
- Why the market is valuing the stock so low or so high?
- Why the cash generation by the Company is so less vis-a-vis the reported profits?
- Why the Company despite sitting on huge cash pile is not rewarding shareholders through hefty dividends?
- Why the business under/ over performing industry trends?
- Why management is not taking up related diversification opportunities?
These are just some examples and in almost every scenario whenever I have to make a decision or something looks too illogical, I try to ask myself “Why”?
Let me now try to go deeper into some situations and explain how this approach helped me.When I was about to buy but didn’t
A world leading automotive lubricants company looking good in most value buying parameters. However, once I asked the question – Why exactly am I buying it… I was clueless…
I then started looking for the trigger that will rerate the stock and couldn’t find any. The automotive sale was going down, EV argument was gaining momentum and lubricants potential was hazy.
None of these factors were making it a bad long term pick but then I couldn’t find the reason for me buying it given my own aptitude of picking up stocks.
In a hindsight, it worked out well as the stock that I instead picked up performed way better.When I was about to sell but didn’t
Recently, I was about to book profits in a pharma API stock. However, before pulling the trigger when I asked why exactly am I selling it, I couldn’t find a suitable answer.
- Is the story over? No
- Is valuation over the top? No
- Issues with corporate governance? No
- Poor financial performance trends? No
- Technical weakness? No
Finally, I just couldn’t find one good reason to sell the stock other than trying to dance in and out of the stock. Finally, I thought that it’s just not worth to try doing that with this stock and I stayed put. In fact, subsequently I picked more !When CFO deboards a business
CFO leaving a Company is always a red flag for me. To a stable/ growing/ reputed Company, I still start with the presumption that it can simply be a career move.
However, if the Company has recently started reporting improved numbers and the CFO leaves, I want to surely find out the reason… Why?
No one would want to leave a just reviving business. My immediate presumption in this situation would be – numbers are incorrect.
If it’s mentioned as personal reasons – a bigger red flag.When despite good performances, management sounded cautious during the quarterly calls
A consumer company and the business was routine normal. Infact, the Company on every parameter was regularly out performing the industry.
Still on every call they were always cautious on something or the other. Why?
Manage analysts expectations. Underpromise and overdeliver vs the other way around.
Over period I have found this to be a common trait of most good managements.When the market continues to ignore a well performing business available at reasonable valuations
A consumer company with decent product portfolio, good management and reasonable valuations. No major red flags.
Then why interest is absent and stock price continues to lag behind ?
In the past, the Company got overshadowed by a larger competitor and hence the performance though not bad was average. Since then, the Company seemed to have covered reasonable ground on various parameters, found it’s niche and the performance had also started catching up. However, investors at large still continued to remain doubtful. On closer look, it was clear that some selective investors had started getting interested again and it’s only a matter of time that stock gets heightened interest.
Right time for me to get in.When management is not interested in an obvious business opportunity
Many a times we as investors/ analysts consider ourselves as know it all business tycoon types.
Current example – every Company is jumping into Covid related business opportunity and if someone is not and that too a Pharma Company – it’s unforgivable !
Why is it not riding the wave? Have they lost it?
On paying closer attention, I realised –
- every management is human and every human is different with different focus, thought process and priorities.
- Covid is not the only disease in the world and in fact no one even knows what would be it’s future.
- management of the Company sees and has adequately proven that there is significant opportunity that continues in it’s underlying focus areas and continues to utilise the current period (where competition has drifted) to strengthen it’s own product portfolio.
Before finding the answer to the above question, I was disappointed and was keen on selling. Afterwards, I am excited and continue to buy more. Over last one year, the Company continues to deliver some of the best financial performance.
I can keep writing many more examples…
Hope I have been able to demonstrate the importance of “WHY”, and you found the content interesting and useful.
Needless to say, nothing can ever be foolproof in stock investing and mistakes are bound to happen – but for me that’s the beauty of it all 🙂
Some other interesting posts:
- Stock investing: My game, my rules
- Stock selection: Key hacks to avoid big mistakes
- Why stock prices decline when you buy and increase when you sell ?
- Management Commentaries and what I make of them
- Stocks – when to sell?
WHY the article….hmmm joking….nice one
Hello nitin, why you not post your posts on your Twitter account. My suggestion is you should posts your articles on Twitter.
“Keep asking WHY “— These words say it all. Extremely well written.
Nice Article Nitin!!….You have given a very good insights as to how one should analyse stocks great work!!
Nice one Nitin. Keep them flowing