What Tata Elxsi Taught Me About Selling Stocks 

There were just 20 lifeboats aboard the largest ship of its time, the Titanic. They could accommodate about 1,200 passengers. There were roughly 2,200 passengers aboard the ship before it sank.

Titanic was also underinsured. It was worth US$ 7.5 million in 1912 but insured for only US$ 5 million.

In both cases, the reason was the belief in Titanic being unsinkable.

• There is no danger that Titanic will sink. The boat is unsinkable and nothing but inconvenience will be suffered by the passengers.

These words of Phillip Franklin, the vice-president of White Star Line, before the Titanic sailed, got etched in history as symbol of misjudgment.

In this case, the misjudgment was about the quality of build of the ship.

Just a few decades prior to that there was yet another misjudgment.

The Brooklyn Bridge was the largest structure in the West when it opened in 1883. It was almost twice as long as any suspension bridge built before it. Yet people were anxious about its strength.

So much so that a herd of elephants were paraded on the bridge to prove its strength to onlookers.

Yet, on a fateful day, a woman tripped and fell near the pedestrian exit. This caused panic that the bridge is giving away. The panic-stricken bridge crossers rushed for the exit causing a stampede.

Again, there was a misjudgment about the quality of build of the bridge.

Such misjudgments are the norm when it comes to the quality of businesses that are traded in the stock markets.

When I recommended Tata Elxsi in 2020, it was a relatively under-rated technology stock. The company then derived nearly 90% of its revenues from designing products for transportation, broadcast and communication sectors.

Of course, the segment that excited me most was artificial intelligence (AI). Remember this was pre-pandemic time and the scope for AI was not as widely recognized as it is today.

But I believed that what was then a small fraction of revenues for Tata Elxsi had the potential to bring exponential growth in coming decade.

Of course, Tata Elxsi was not the only company to be focused on these technologies. Few larger tech companies had the potential to grab a big share of the AI pie.

So, what was different in the case of Tata Elxsi?

Two things...

1. Focus on design while any new technology can get obsolete very soon...design focused products can be sticky in the minds of customers as companies like Apple has already shown.
2. Extreme focus on R&D for innovation: Tata Elxsi was so focused on R&D that when analysts had gone for the company's investor day in 2018. It already had a prototype of an autonomous car to show us.

So, it was not surprising to me that the company was already winning a healthy order book. Especially with some of the leading auto companies globally.

Plus, to add to that... thanks to its design focus, the company had clients in several other sectors, It catered to their needs of product and packaging design.

When I recommended the stock in 2020, the stock markets were misjudging the strength of the moat in Tata Elxsi's business.

Thanks to this misjudgment I was able to recommend the stock when it was relatively cheap in terms of valuations.

Of course, no prizes for guessing that my value investing checklist made Tata Elxsi the most suitable buy to recommend at that point.

To my good fortune, the stock markets soon corrected the misjudgment about Tata Elxsi. And Equitymaster members who had bought the stock reaped rich reward within months.

But then came the real test of misjudgment.

The stock of Tata Elxsi saw a meteoric rise in valuation multiple in the months following the pandemic.

In fact, by March 2022 the stock had already turned into a 10 bagger. That too within less than 2 years of my buy recommendation.

My estimates told me that it would be a very tall order for the company to hold on to such valuations. So, the downside risk from the peak was huge.

I could sense yet another misjudgment in the markets about the earnings power of the business.

The quandary was whether to act on the misjudgment and recommend exiting the stock. Or to stay greedy for further gains until the stock starts correcting.

I chose the former. I recommended Equitymaster members to act on the market misjudgment in 2022 as swiftly as I has recommended them in 2020.

Those who acted on my recommendation would have fetched gains of around 1,051%.

Within a year since the recommendation, the stock of Tata Elxsi corrected about 45%.

So, me not acting on the second round of misjudgment could have cost Equitymaster members almost half of their notional gains on the stock.

The discipline of sticking to checklists works wonders in the case of both buying and selling stocks. The stock of Tata Elxsi taught me this important lesson about acting on misjudgments.

And I do not hesitate to pass on this lesson every time I am asked if I recommended a sell too early.

The stock market version of...a bird in hand is worth two in the bush.

To delve deeper into the fundamentals of the 'best technology stocks to have in your watchlist' the Equitymaster Screener can be a very useful tool.

Hope you like this video. Thanks for watching.