Events of the last few days have demonstrated the bizarre behaviour of the stock markets to an amusing degree. Of course, I should actually say bizarre behaviour of stock traders rather than the stock markets because that's what it really is. On June 14, there was this news item that the National Stock Depository Ltd had frozen the accounts of three Foreign Portfolio Investors who had substantial investments in Adani Group companies. The group's stocks went into a free fall, even though the companies denied this. A day later, the NSDL itself denied this. However, even after that, the stocks have remained in free fall.
A rational observer, who is not familiar with how the mental machinery of stock traders works, would be puzzled. If the stocks fell so sharply in reaction to certain news, should they not start rising up when that news is shown to be incorrect? Not just a rational investor but many people who had invested in the Adani stocks would be wondering the same thing. However, one can make a reasonable conjecture about what happened. The Adani stocks had risen a lot (between 150 and 1000 per cent) over the last one year or so. A lot of people were sitting on big returns and surely, must have felt that they were out on a limb. Once the FPI freezing news came, they decided to get out, while the going was relatively good. It quickly became a stampede and stampedes are not easy to stop. Rationality goes out of the window when the question is of protecting money that has been made easily and a little too quickly.
Here's another interesting case. This one is about bitcoin and as we all know, no one can accuse bitcoiners of being rational but it's an example worth looking into in any case. On May 13, Elon Musk tweeted that Tesla would no longer accept bitcoin as payment for its cars because of environmental concerns about its high energy usage. Bitcoin prices fell sharply in reaction to Musk's tweet. The statement had a lot of impact because Musk and his company have been big cryptocurrency enthusiasts.
Then, on June 14, Musk tweeted that when bitcoin became more energy efficient, Tesla would start accepting it again. In response, there was a large upsurge in bitcoin price. The interesting thing here is that the two statements are not contradictory. They depict the same underlying intention yet the reaction was the exact opposite. Let's not get into whether Musk is deliberately manipulating bitcoin prices because that is irrelevant to the issue. The point here is that, just like the Adani case, there can be large and irrational reactions to all kinds of news.
Why does this happen? The answer is pretty clear. There are way too many investors who have close to zero confidence in what they have bought and why they have bought it. They don't know whether the investment is any good and are just going along for the ride. Such investors (although investors are not the word) react sharply and irrationally to any kind of news. However, from their point of view, what they are doing is not actually irrational. They have little idea about what their investments are actually worth and no view of what they should fundamentally be worth in the future. So, it's entirely rational - from their point of view - to behave like this.
Of course, not everyone can do all their research themselves. So the requirement is not to understand everything personally. It's just to have a process and a source of investment ideas and information which is based on the reality of companies rather than just a passing fancy.
If investors did that, then they would have a reason-based view on what that Adani stock or anything else is actually worth. They would then not worry about a random news item or an Elon Musk tweet and would actually not pay attention to such news. If a stock fell 10 or 20 or even more per cent, they would probably just re-examine their thesis and then actually buy more. If you look at some of the stocks that have made enormous money for investors, there have been episodes where they lost big chunks of their price. Investors who paid attention to the hot news of the day would sell and lose out.
In fact, I've always seen that most investors' problems arise out of things that they did or didn't do over months and years. Similarly, fixing those problems also involves taking actions that need to be sustained over months and years. One never comes across an individual whose investments have done badly because he or she didn't keep track and react to events. In other words, unless you are able to ignore the news, there's probably something wrong with the way you invest.
Obviously, as I'm fond of saying, that's where Value Research comes in. To avoid an investing style based on the whims of the day's news, check out the stock recommendations on Value Research Stock Advisor. When one of our stocks falls, we update you on what's happening and why and (generally) why you must stay the course. We do our homework so that you don't have to panic about the news.