The confidence trick | Value Research Markets fall and then rise. And with them, many stocks fall and rise again.
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The confidence trick

Markets fall and then rise. And with them, many stocks fall and rise again.

What do investors do when a stock that they are heavily invested in falls sharply? There are three types of reactions possible:
1. When stocks fall, many investors cut and run. Clearly, they feel that since a stock has fallen, it may never rise again and their losses may become permanent.
2. Other investors keep holding on, with the view that the fall is temporary and eventually their stock will recover. They are reasonably confident of their investment.
3. Still others actually use the period of low prices to buy more of their stock. They are the ones who know with full confidence what the stock is actually worth.

Of course, there are other factors involved in each of these three behaviours an investor displays; for example, the degree of diversification in an investor's portfolio or other personal financial circumstances. In general, I have observed that those who are in any particular category tend to stay there. However, sometimes the movement of the market teaches those who are in category 1 how they should actually be investing.

To illustrate this vividly, let me take you back to the crazy days of 2007-08. Let's compare how Stock A and Stock B did between January 1, 2008, and the end of March 2008, and then let's see where they are now. Note that these are adjusted prices to enable a correct comparison over the years.

From January 1, 2008, to March 31, 2008, Stock A fell 24 per cent and Stock B fell 41 per cent. During that period, the BSE Sensex fell by 23 per cent. 41 per cent is a lot more than 24 per cent but in the midst of a market crash, it's in the same rough range. Now, 14 years later, Stock A is up about 800 per cent while Stock B is down about 90 per cent. As seasoned investors may have figured out, Stock A is HDFC Bank while Stock B is Reliance Infra.

Let's look at the three categories above again. HDFC Bank investors would have been correct to stay in category 3, while Reliance Infra investors would have been correct to be in category 1, provided (and this is the main point I'm trying to get across) they had full awareness of what the stocks were actually worth and had confidence in what they understood about the companies. So, what gives anyone that confidence?

Let's take a look at something very interesting from America. This is the letter that Amazon founder (and then CEO) Jeff Bezos wrote to shareholders in 2000, when during the preceding year, the stock had fallen by 80 per cent. While you should search and read the entire letter, here are some of the points he made right in the beginning:

  • We served 20 million customers in 2000, up from 14 million in 1999.
  • Sales grew to $2.76 billion in 2000 from $1.64 billion in 1999.
  • Pro forma operating loss shrank to 6% of sales in Q4 2000, from 26% of sales in Q4 1999.
  • Pro forma operating loss in the U.S. shrank to 2% of sales in Q4 2000, from 24% of sales in Q4 1999.
  • Average spend per customer in 2000 was $134, up 19%.
  • Gross profit grew to $656 million in 2000, from $291 million in 1999, up 125%.
  • Almost 36% of Q4 2000 U.S. customers purchased from one of our ''non-BMV'' stores such as electronics, tools, and kitchen.
  • International sales grew to $381 million in 2000, from $168 million in 1999.
  • And, most importantly, our heads-down focus on the customer was reflected in a score of 84 on the American Customer Satisfaction Index. We are told this is the highest score ever recorded for a service company in any industry.

There's nothing about the stock market here. This is what mattered. As they say, the rest is history. From the time of this letter, the Amazon stock is up 200 times. Based on our three categories above, a knowledgeable and confident investor would definitely be in category 3.

What I'm saying here is not that stocks that fall can rise again. As we know well, there are plenty of stocks that do not ever rise again and essentially destroy all value for shareholders. Instead, the moral of the story is that you need to know your stock, the business, your investment case and have confidence in your knowledge.

The investment thesis has to be clear in your mind. Not just clear, but correct.

This is exactly what Value Research Stock Advisor does for you. It gives you not just a list of stocks to buy but their investment theses. More than that, our researchers and analysts keep re-examining the thesis and keep it updated and fresh, so to speak. Members get not just the 'what' but the 'why'. This is a long game and one in which you need all the help that you can get. That's the role of Value Research Stock Advisor. We don't pretend to take all the decisions for you - we are your research assistant team but our goal is to make you the investor.

Let me just recap what you get when you become a member:

  • Access to all our (currently 52) stock picks
  • Best Buy Stocks: 17 stocks selected from our recommendations. Use this set to start building your portfolio right away!
  • The complete investment thesis for all recommended stocks so that you understand why you are investing.
  • New recommendations as soon as they are released.
  • Continuous updates and analysis on all recommended stocks straight from our dedicated analyst team.
  • Tools and data to research and analyse any other stock.

Here's the thing: what you get out of all this is what you make of it, but the most important parts are empowerment and confidence that your thesis is right and that you will stay in category 3. Many investors make good choices but in the ups and down of the markets, they lose confidence and bail out too early. What we do is give you all the inputs you need for you to maintain the strength of your convictions. A major part of our job is to keep in touch and support you during the times when things are looking shaky.

Finally, recommendations are just that - something that we recommend you do. The real achievement of Value Research Stock Advisor is that all those members are becoming real investors themselves and not just consumers of investment information. It's time for you to join their ranks.


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