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How to gain conviction in a stock - and stick to it

Value Research Stock Advisor doesn't just tell you good stock ideas. It also helps you maintain your conviction in them

How to gain conviction in a stock - and stick to it

At first sight, it would appear that the primary role of a stock advisor is obviously to advise on which stocks to invest in. Perhaps it is, but a close second would be to act as a personal therapist. As an advisor, I can tell you 40 to 50 stocks that will make huge gains in the years to come, and indeed that is exactly what the Value Research Stock Advisor will do if you become a member.

However, there is no way in the world that all these stocks will make money all the time. There will be periods when these stocks will do badly. There will even be some stocks that do not live up to the expectations and we'll issue a 'Sell' advice on them at some point. You will probably lose money on those. Those are the times when the personal-therapist side of a stock analyst needs to emerge.

I'll give you an example of a great stock. I won't name it, but astute readers will probably recognise it from the information I share. Let's look at the annual stock performance of this stock in the 25 years since 1996. During these years, this stock gave incredible returns, multiplying by 446 times! That's 44,467 per cent, if you like reading even bigger numbers. However, there were some pretty frightening times once in a while. For 18 of these years, this stock gave positive returns. If I just see these years, the returns were 1,938 times or 1,93,669 per cent.

One of the years was flat, so we'll ignore that. During six of the remaining years, the stock was negative. If I just look at these years, the returns were 0.23 times, that is, a loss of 77 per cent. So the positive years multiply to 1,938x and the negative ones to 0.23x and overall, we get 446x! And that's what happened to a great stock. There was one year alone when the stock fell to almost half its value. Now there can be many ifs and buts in this story, but the fact is that when half your money in a stock disappears, the urge to cut and run can be pretty strong.

In fact, there was a single six-year stretch, starting with the bad year above, when the overall returns were negative. I know for a fact that during those years, many investors sold off and quit this stock and yet many stayed. After that six-year losing period, the next six years yielded more than 700 per cent returns. The confidence of the ones who stayed was rewarded handsomely.

The question that we investors must answer for ourselves is what the difference psychologically is between those who stayed and those who ran. What gives the former the confidence? The answer is knowledge. If you understand the business and can see where it is going, then you don't worry when the stock stagnates or declines. In fact, you see a buying opportunity. Buying this above stock during those six stagnant years was a great opportunity, probably one of the greatest in the last decade in the Indian stock market. And I'm not saying this in hindsight. Throughout those years, many people did this, including some really smart mutual fund managers.

However, professional asset managers have a different context. The question that is important to you and me is different: how is an individual equity investor going to find the confidence to do this? There's a wise old saying on Wall Street, "Never borrow someone else's conviction." It's often misunderstood as meaning that one should do all one's own research. However, let's face it - few of us have the time or the resources to research stocks.

I think this is where Value Research Stock Advisor comes in. Unlike broking houses or general social-media tipsters, we are not interested in our members borrowing our conviction. We work openly and give extensive inputs to people. If they find us convincing, then they can evaluate and work with that conviction. If not, then they can decide whether Value Research's conviction is good enough for them, or they can choose their own path.

The important thing is what will happen when they hit a lean patch in the kind of great stock that I talked about above. It's during that time that having a professional advisory service that operates openly and transparently proves its value. An individual investor can get scared, but when there's a team of full-time analysts at Value Research standing by your side, then it's a different story. You get to know the logic of why Value Research is saying what it's saying. Accept it or not, either way, it's a better informed decision.