If facts change, do you change your mind?

What is Multibagger Stocks? Understand Well To Pick One

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.


Press to call for Free Trial (022) 3946 4344