What Tata Coffee can teach us about investing in the stock market
01-Aug-2016 •Vikas Vardhan
A few days ago, I got a phone call from my stock broker. He urged me to buy Tata Coffee stocks. Usually I don't entertain such calls, but since I have already covered this stock in the past and I myself own it in my family portfolio, I thought about hearing him out. Just to know his rationale behind buying the company, I asked him why I should buy it. He said that I should buy it because it's 'poised to go up' in the near term. He couldn't add more details. Obviously, he didn't know what he was talking about, so I disconnected the call.
Next morning, while glancing through a business newspaper, I saw the mention of Tata Coffee at least thrice. I saw a report on it on a business channel, too. I noticed that over three months the stock had risen 30 per cent, whereas the Sensex had remained flat at 9 per cent. I wondered what had made a boring company that sells coffee a 'celebrity' stock.
After some digging, I realised that the reason behind the rise in the stock price was that coffee prices have gone up. Heavy rains in Brazil, which is the global leader in coffee, had damaged the coffee crop, which led to a rise in coffee prices.
There are some investors who would like to buy the Tata Coffee stock because of rising coffee prices. I fail to understand why anyone should buy it just because it's raining heavily in Brazil. Yes, I hold Tata Coffee and will continue to do so for many years, but I hold it not because it's raining in Brazil but because of other fundamental reasons. I feel the reason why you hold a stock is important. If you don't have a strong reason, you are unlikely to benefit from the stock's full potential.
Take Tata Coffee's case again. Yes, it's raining heavily in Brazil but the next year it might not. The prices are rising now, but you don't know how long they will continue to rise. You can make small profits on the stock, but you may miss out on the big gains. It's also possible that by the time the news about the jump in coffee prices reaches you, the stock has already run up. If you do manage to get in at the right time, how would you know when to sell the stock?
Now let's see things from a fundamental, long-term perspective. Tata Coffee has 19 coffee estates spread over 18,244 acres, which makes it one of the largest integrated coffee plantation companies in the world, with a strong parentage. With changing lifestyles, more people are going to drink coffee and Tata Coffee is one of the best candidates in India to exploit this opportunity. This is a simple, easy-to-understand reason why you should own Tata Coffee.
The message is simple: don't pay attention to short-term spikes in stock prices. Do not buy Tata Coffee simply because it recently hit the newsrooms. Buy it because there is a much stronger fundamental reason why you should. When I bought Tata Coffee, no one cared about it and so I got a great deal. It's just a matter of time when boring things become exciting.