If facts change, do you change your mind?

If facts change, do you change your mind?

Rakesh jhunjhunwala

I have often preached on this blog  when facts change, one should consider them rationally and change ones mind if required. Well, as always, it is easier to preach than practice.
Let me tell you a recent story. I spoke very briefly about a company in this post.The company was Ricoh (I) ltd. You can download my detailed analysis of the company here. So after doing this detailed analysis in late 2010, I built a decent position at an average price of around 35-37 Rs/ share.The company continued to perform poorly (as I expected) as it had done an acquisition and was also investing heavily into sales and marketing.The topline grew by 40%, but the net profit dropped from around 15 Crs to a loss of 5 Crs in 2012. The price continued to stagnate in the range of 37-40 rs during this period.
I have been consolidating my portfolio and weeding out the weaker ideas for the last 2 years. As a result, I exited Ricoh in the feb-march time frame. I think it was a rational thing to do based on the information I had as of March 2012. The change The company declared the Q4 2011 results in April and reported the following Q4 sales growth, YOY  60% Net profit growth, YOY  73% (12 Crs profit in Q4 versus 11 crs loss in Q3) The price action can be seen below
As you can see, the market did not react immediately to the turnaround in the performance and there was a 1-2 month window for an intelligent investor to digest this information and purchase the stock. So that proves my level of intelligence 
The explanation It is easy to call the decision, stupid and move on. The true reason for my failure to capitalize on the change in performance (which I was expecting) is due to a behavioral bias.
The bias is called the commitment and consistency bias. In simple words, once one makes a decision, the tendency is to commit to the decision and be consistent with it. This results in ignoring positive information as in the above case or holding on to a losing position (inspite of consistent negative news) and hoping that the price will rise in the future.Not a one off case
The above incident was not a one off in my case. I have made the same mistake twice earlier  in the case of VST industries and Mayur uniquoters. I sold the stocks and then saw the fundamental performance improve, after the sale. Instead to getting back into the stocks (as I already knew about the companies), I just ignored them and lost out on pretty decent gains.
I have become alert to this bias now and am paying more attention to sudden turning points in the performance of the stocks I hold or have held in the past.
It is better to look foolish (in my own eyes), than miss out on a good idea

Added note  
The above example does not mean Ricoh India is a good buy and should be purchasedat the current price. It is quite possible that the performance may regress and so would the stock price. The example is only for illustrative purposes.

Stocks
discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer towards the end of blog.


 

ABOUT AUTHOR

RohitChauhan : We are a team of stock market nerds trying to stay ahead of the herd. We spend our grey cells everyday to a pave a smooth road for our clients in the shaky world of stock market. While tracking the mood swings of the market we bring our clients the most rewarding deals.

LEAVE A COMMENT

RECOMMENDED READING

Portfolio Management Service: Outsource Your Investment Worries

The stock advisory service is the best option for you if you want to invest in stock market but don't have adequate knowledge of it. An advisory firm gives you the much-needed hand holding to take the right decisions. Their research reports an
Read More>>

Stock Advisor: For High Growth & Better Risk Management

Stock investment is messy. Yes, there is a big growth potential but if you are doing it on your own and you don't have the experience of fundamental analysis, it can be an uphill task. That is one of the reasons why most of the investors who u
Read More>>

Rupee Tumbles To A New Low; Market Expected To Consolidate

Our Analysis This week, the market consolidated between 11,300 to 11,500 due to lack of positive triggers & consolidation in heavyweights like HDFC, HDFC Bank, Reliance. Indian Rupee de
Read More>>

Free Share Market Tips Today: Stop & Read Before You Invest In Stocks

Various popular stock market news portals and TV channels discuss trending stocks and provide free share market tips based on technical charts and often without in-depth research. Our research desk analyses these trending stock market tips and pro
Read More>>

Value Investing: The Road To Value Picks & Undervalued Stocks

You must have heard many times that Warren Buffett is a value investor. In the Indian context, even Rakesh Jhunjhunwala is referred to as a value investor. It does tell us that these are smart investors but what exactly does value investing me
Read More>>