Better Investing
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Better Investing

The Investors Dilemma

Stop Loss or Hold Long

The rout that has been going on in the global markets, in the tech stocks have hit our Indian shores hard as well.

All the newly listed companies which don't have a long history of generating profit; or most that don’t have a history at all of generating profit are facing the most heat.

Especially companies which don’t have a compelling business model, brand image or any other such ‘moat’ that can keep future competitors away.

Though I was attracted to NYKAA it was clear that it was heavily overpriced. I just bought one share to keep tabs. It is down 21 per cent now from when I bought it. And that’s just one. Fortunately, I had kept away from more stretched valuations like in Paytm.

https://www.business-standard.com/article/markets/indian-start-ups-feel-the-heat-of-global-technology-driven-sell-off-122012500054_1.html?utm_source=Spotlight&utm_medium=website&utm_campaign=Newsletter_11072018

However, I was not that lucky with GOCOLORS. It is now down 19 per cent. And not stopped going down. I was hasty in purchasing this, and also not willing to cut losses early. However, the investment in this is just a fraction in value.

Like every investor, there is a bias to hold on to the loss-making investment. However, whenever I have felt that I have made a mistake, I have exited such investments irrespective of whether it was in loss or in gain. I do not consider GO Fashion to be a mistake, but of course, the valuation was definitely a mistake. That’s fine now; as I am willing to wait for some years here.

So why don’t I have a stop-loss kept. If you are a day trader then this is mandatory as you are investing in momentum and other indicators and you want to minimize risk.

As an investor, your mindset in-stock selection is completely different. You are also in to make money. However, you want to minimize risk by intuition; and the market rationality factor that comes with a larger time interval.

Mr Maket, as Benjamin Graham quotes, is absolutely neurotic in a short time span; either in throes of depression and cynical or extremely exalted and throwing all caution to the wind. We saw the latter phase in spite of the raging Covid times; when bolstered by liquidity people were willing to pay sky-high PE multiples or extreme valuations for the next Amazon story or the next Tesla story.

Now the times have turned and every commentator is stretching the extreme valuations. I guess retail investors are off-loading the new age IPO shares by the bucket load, and FPI are off-loading everything till the situation in Ukraine stabilises a bit.

It is here where the concept of Position comes into play.

In the book Reminiscences of a Stock Operator (a mandatory read) the author quotes an anecdote of the old-timer investor he encounters. All the old fellow used to say for every news or tip was this statement — “Its a Bull Market !!” . Here is the excerpt if you have not read — https://www.billionairebookclub.net/its-a-bull-market-reminiscences-of-a-stock-operator/

The main lesson is this — there is a cost to Sitting still; not giving up your position. When you give up your position you are giving up the risk and also the reward; the possible future reward.

Here is what the author quotes

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy… “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells he’ll lose his job. What do you know about that?”

“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.

And when you talk about Position- you need to also talk about the type of stock. Holding on to a position is worth only for a growth stock. This could be a fast grower; or a cyclical on its way up like Hero Motors. It may be worthwhile to hold on to the position in a stalwart like Infosys; as you are sure it will rebound.

A position is worthwhile to hold only if the future holds promise, and you have time; years of time on your side.

A position is worthwhile as other than cyclical stocks and to some extent stalwarts; it's hard to time every crash.

A position in a hyped stock is not worthwhile. A position in a disgraced stock — corrupt management or other such real reason is not worthwhile to hold. Inefficient PSU’s one has to be wary; though PE’s describe them as a value stock, they are anything but value.

I talked about the hyped stocks. Nykaa , Paytm , Zomato etc fall in the list. Other than Nykaa the others already have pretty strong competitors though not listed. As investment experts say, there is not much differentiating business model or execution excellence in each. The first-mover advantage is usually never a long term advantage. There is no ‘moat’ to keep competitors away; so the pricing pressure should come in and should eat away in the margins. This is especially true of technology-driven companies; Amazon is not just a technology-enabled warehousing behemoth. Its operational efficiency and process are differentiating and harder for competitors to copy. It’s the culture of Day 1 always https://aws.amazon.com/executive-insights/content/how-amazon-defines-and-operationalizes-a-day-1-culture/. This is their moat. For Infosys and TCS, it could be the HR and training; that works with IT manpower at scale. Maybe Nykaa has something there, but we need to wait and see and not hurry. Positions need not be taken in a day.

So which Positions am I guarding still? In spite of this crash and in spite of it bottoming out to even zero.

Why zero, because you do your work as per your capability and come up with positions to hold. And if you are wrong; well you pay the price; as I am not sure if Ray Dalio says that (https://www.goodreads.com/book/show/34536488-principles) - but there are Principles here, and this is as good as any other.

So I am long on Infosys and Sona Comstar; For the first, my paper profit has come down by twenty per cent, though I am certain it will recover. For the latter, it is a newly listed company and my paper profit has come down by forty per cent; Still, this seems to have a moat in that it is an industry leader in starter motors and differential assembly in domestic as well as international markets in CV segment - https://businessindia.co/magazine/sona-comstar-gears-for-future-mobility . So this seems to have some moat.

I am accumulating on Hero Motors and Exide and HDFC Life; the former two as they are cyclical on the upcycle; and the latter seems to have a lot of growth potential and seems under the radar.

Let me see how my Positions and Principles play out in 2022.

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Investing principles from the masters and the gainers applied for the post inflation world

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Alex Punnen

Alex Punnen

SW Architect/programmer- in various languages and technologies from 2001 to now. https://www.linkedin.com/in/alexpunnen/

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