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Have you ever fallen in love? - Views on News from Equitymaster
 
 
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  • Dec 19, 2008

    Have you ever fallen in love?

    With your stocks, that is? You might have come across instances when you got emotionally attached to stocks. At times, you might have held on to gaining stocks expecting sky to be the limit. And then, in times like these, you must be holding on to some losing stocks in the hope that things will turn out better in the long run.

    We have a word of advice for you -please save emotions for your family, not for your stocks. This is one of the surest ways to make money in both bull and bear markets.

    There should be no emotions whether you are buying or selling a stock. There may be other better opportunities in other equity or other asset classes that you might miss.

    It is important to have independent ideas to keep aside emotions from investing decisions. Not getting influenced by the herd mentality is very critical for attaining this independence.

    Stock market tend to go to extremes. At times, they reach a stage of extreme confidence. And at others, you see nothing but excessive pessimism. “Be fearful when others are greedy and greedy when others are fearful,” said Warren Buffett. In simple terms, this means to buy from the sellers and sell to the buyers...without getting emotive.

    The decision to sell a stock is as important as the decision to buy it. Your returns will be impacted if any of these decisions are not taken well.

    Assume that you were emotionally attached and held on to, say Infosys, at the peak of the dot-com boom. How much were you willing to pay for the stock? 200 times, or 300, or even 350 times its earnings? And did you sell the stock when it crashed 30%, 40%, or even 50% from the peak? Probably not, because you believed that Infosys was a wonderful company and that the stock price will return to its peak levels again.


    Source: Equitymaster

    Agreed, Infosys has always been a wonderful company. Its business model has always been innovative. Its management has always been visionary. Its business practices have always been ethical. But please understand, there is always a price that you should be willing to pay for any given opportunity.

    After dropping to the bottom from its peak, Infosys has traded within a range of 13 times to 41 times its earnings. You paid a price of getting emotional with this stock. And now you understand the implication of taking an incorrect decision as far as selling is concerned.

    While taking a decision to sell/not sell a stock, the key is to understand whether a business model has matured or valuations are way out of line. In the period between mid-2003 and end-2008, all kind of stocks rose with the tide, quality of business and management notwithstanding. In current times, stocks across the board are crashing, again without any differentiation to quality of business and management.

    A good idea for you will be to hold on to stocks where the underlying businesses are strong, expected to weather the downturn, and emerge stronger. But if you believe that you had made a wrong decision in the first place by investing in a ‘hot’ stock, it is time to set aside emotions and get rid of the stock to minimise your losses.

     

     

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