When it comes to stock market basics,we have never seen a person like Prof Sanjay Bakshi who has the magnificent charisma to explain it better. In his latest article, he explain his thoughts on Roller Coaster Investing. The note clearly explain the temptation to sell long term holdings for short term gain. He takes the example of Wabco India and explain it neatly. From January 2009 till date, Wabco India corrected more than 20% 6 times, but the stock has traveled from Rs. 170 to Rs. 5400. So interesting, Isn't ?
Sanjay Bakshi then quotes from the legendary Philip Fisher's book - Common Stocks and Uncommon Profits as below
“Should an investor sell a good stock in the face of a potentially bad market? On this subject, I fear hold a minority view, given the investment psychology prevalent today. Now more than ever, the actions of those who control the vast bulk of equity investments in this country appear to reflect the belief that when an investor has achieved a good profit in a stock and fears the stock might well go down, he should grab his profit and get out. My view is rather different. Even if the stock of a particular company seems at or near a temporary peak and that a sizeable decline may strike in the future, I will not sell the firms’s shares provided I believe that its longer term future is sufficiently attractive.
When I estimate that the price of these shares will rise to a peak quite considerably higher than the current levels in a few years time, I prefer to hold. My belief stems from some rather fundamental considerations about the nature of the investment process. Companies with truly unusual prospects for appreciation are quite hard to find for there are not too many of them. However, for someone who understands and applies sound fundamentals, I believe that a truly outstanding company can be differentiated from a run-of-the-mill company with perhaps 90 percent precision.
It is vastly more difficult to forecast what a particular stock is going to do in the next six months. Estimates of short-term performance start with economic estimates of the coming level of general business. Yet the forecasting record of seers predicting changes in the business cycle has generally been abysmal. They can seriously misjudge if and when recessions may occur, and are worse in predicting their severity and duration. Furthermore, neither the stock market as a whole nor the course of any particular stock tends to move in close parallel with the business climate.
Changes in mass psychology and in how the financial community as a whole decided to appraise the outlook either for business in general or for a particular stock can have overriding importance and can vary almost unpredictably. For these reasons, I believe that it is hard to be correct in forecasting the short-term movement of stocks more than 60 percent of the time no matter how diligently the skill is cultivated. This may well be too optimistic an estimate. On the face of it, it doesn't make good sense to step out of a position where you have a 90 percent probability of being right because of an influence about which you might at best have a 60 percent chance of being right.
Moreover, for those seeking major gains through long-term investments, the odds of winning are not the only consideration. It the investment is in a well-run company with sufficient financial strength, even the greatest bear market will not erase the value of holding. In contrast, time after time, truly unusual stocks have subsequent peaks many hundreds of percent above their previous peaks. Thus, risk/reward considerations favor long-term investment.
So, putting it in the simplest mathematical terms, both the odds and the risk/reward considerations favor holding. There is a much greater chance of being wrong in estimating adverse short-term changes for a good stock than in projecting its strong, long-term price appreciation potential. If you stay with the right stocks through even a major temporary market drop, you are at most going to be temporarily behind 40 percent of the former peak at the very worst point and will ultimately he ahead; whereas if you sell and don't buy back you will have missed long-terns profits many times the short-term gains from having sold the stock in anticipation at a short-terns reversal. It has been my observation that it is so difficult to time correctly the near-term price."
Sanjay Bakshi concludes the post by below note
"This post makes two points: (1) Big money is in buying and holding great businesses. (Although not specifically mentioned, it is implied that those businesses were acquired at reasonable valuations.); and (2) Owning such businesses will produce gut-wrenching roller coaster rides which the investor has to have the willingness to take. They can’t avoid those rides by jumping out and trying to get back in, and attempts to do so are likely to be unsuccessful. So, the best strategy is to stay put and bear it.
This post also does not claim that those gut-wrenching declines occur only in stocks of great businesses. They don’t. They occur in stocks of almost all businesses. However, in the case of great businesses, they don’t matter in the long run. They look like tiny blips on a chart"
Read the complete pdf here
 |
| Prof Sanjay Bakshi |
Sanjay Bakshi then quotes from the legendary Philip Fisher's book - Common Stocks and Uncommon Profits as below
“Should an investor sell a good stock in the face of a potentially bad market? On this subject, I fear hold a minority view, given the investment psychology prevalent today. Now more than ever, the actions of those who control the vast bulk of equity investments in this country appear to reflect the belief that when an investor has achieved a good profit in a stock and fears the stock might well go down, he should grab his profit and get out. My view is rather different. Even if the stock of a particular company seems at or near a temporary peak and that a sizeable decline may strike in the future, I will not sell the firms’s shares provided I believe that its longer term future is sufficiently attractive.
When I estimate that the price of these shares will rise to a peak quite considerably higher than the current levels in a few years time, I prefer to hold. My belief stems from some rather fundamental considerations about the nature of the investment process. Companies with truly unusual prospects for appreciation are quite hard to find for there are not too many of them. However, for someone who understands and applies sound fundamentals, I believe that a truly outstanding company can be differentiated from a run-of-the-mill company with perhaps 90 percent precision.
 |
| Wabco India |
It is vastly more difficult to forecast what a particular stock is going to do in the next six months. Estimates of short-term performance start with economic estimates of the coming level of general business. Yet the forecasting record of seers predicting changes in the business cycle has generally been abysmal. They can seriously misjudge if and when recessions may occur, and are worse in predicting their severity and duration. Furthermore, neither the stock market as a whole nor the course of any particular stock tends to move in close parallel with the business climate.
Changes in mass psychology and in how the financial community as a whole decided to appraise the outlook either for business in general or for a particular stock can have overriding importance and can vary almost unpredictably. For these reasons, I believe that it is hard to be correct in forecasting the short-term movement of stocks more than 60 percent of the time no matter how diligently the skill is cultivated. This may well be too optimistic an estimate. On the face of it, it doesn't make good sense to step out of a position where you have a 90 percent probability of being right because of an influence about which you might at best have a 60 percent chance of being right.
Moreover, for those seeking major gains through long-term investments, the odds of winning are not the only consideration. It the investment is in a well-run company with sufficient financial strength, even the greatest bear market will not erase the value of holding. In contrast, time after time, truly unusual stocks have subsequent peaks many hundreds of percent above their previous peaks. Thus, risk/reward considerations favor long-term investment.
So, putting it in the simplest mathematical terms, both the odds and the risk/reward considerations favor holding. There is a much greater chance of being wrong in estimating adverse short-term changes for a good stock than in projecting its strong, long-term price appreciation potential. If you stay with the right stocks through even a major temporary market drop, you are at most going to be temporarily behind 40 percent of the former peak at the very worst point and will ultimately he ahead; whereas if you sell and don't buy back you will have missed long-terns profits many times the short-term gains from having sold the stock in anticipation at a short-terns reversal. It has been my observation that it is so difficult to time correctly the near-term price."
Sanjay Bakshi concludes the post by below note
"This post makes two points: (1) Big money is in buying and holding great businesses. (Although not specifically mentioned, it is implied that those businesses were acquired at reasonable valuations.); and (2) Owning such businesses will produce gut-wrenching roller coaster rides which the investor has to have the willingness to take. They can’t avoid those rides by jumping out and trying to get back in, and attempts to do so are likely to be unsuccessful. So, the best strategy is to stay put and bear it.
This post also does not claim that those gut-wrenching declines occur only in stocks of great businesses. They don’t. They occur in stocks of almost all businesses. However, in the case of great businesses, they don’t matter in the long run. They look like tiny blips on a chart"
Read the complete pdf here
Perfect !!
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