Ahhh…the stock market!!

I have been buying and selling stocks for nearly 2 years now. My initial transactions were mostly (and only) tip based. I made money in selling some and made it all even by losing in the others. Whenever I made a profit, I patted (imaginative) myself for my stock skills and when there was a loss I considered it to be the cost of education, essentially lessons on investing. Thus, I never really gave up – the market was kind too, I must admit. Sometimes advice to others too turned out positive (making them richer notionally) thus acting as pillars to confirmation bias. The truth is that I have been lucky when I made profit and unlucky when I booked losses – nothing less, nothing more.

Then a few months ago, I joined a startup investment fund. Our work is to figure out if there are companies that trade below their intrinsic value. And if we are lucky enough, we understand their business and take a decision to pick up a small equity at a reasonable price or to simply pass on the idea for future. My experience here so far has been really great.

I owe equal credit to my colleagues, Arun and Gaurav and to the cranked stock market. Within a few days of my joining the team, the bulls of Dalal Street unleashed their energy (and monies) and the BSE’s Sensex (a barometer of the Indian stock market) went north from 16000 to 21000. The scene was like this – day 1, you choose a stock and study about it, day 2, think you are comfortable to do more research, day 3-4-5 you study more, day 6 you decide to invest, but the price has already doubled!!! It looked like doing PhD in one semester if you really want the degree.

I believe I have committed a mistake during this unusual time. I too advised people to invest in certain stocks based on inputs from “who-I-thought-were-smart-investors”. Initially, it worked. It had to because when everything goes up it really does not matter what you bet on. There is no dearth of stories and arguments (land value, India growth story, etc.) to justify the trend. A return of 20-25% over a year looked bad. Greed prevailed. Everybody wanted to double their money in half the time. Some wanted to day-trade and double it in a day!!! I too played with my tiny portfolio and made a few quick bucks. A few of my friends lauded my investing skills while others thought I was learning too much too quickly at my company. Everything looked great like this smiley:)

Then came the write-downs from the Wall Street giants. Stories of US recession became talk of the town. At least the markets in India could not really “decouple” themselves from the crisis and hence they tanked!! While it may take a record 5 days for the Sensex to go from 18000 to 19000, it took just 1 day for it to lose more than 2000 points. Everyone was in panic. Is the party over? I saw a newspaper headline – “We predict the markets to go down till 6000″. As if people have less to cry on. Those who were never invested considered themselves smarter and people like us as gamblers (I would prefer being called a gambler over a fool). Gradually, I could witness that there were no inputs from the “smart investors”. I too had no recommendations. I lost the charm. I was no more a good investor. I had no “tips” to give. Ahhh..the stock market betrayed me:(

There is a nice one from the investing God, Warren Buffett: “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

Nevertheless, all these ups and downs in the market helped me understand things better. In such a short time, I got such varied perspectives of the market. My confidence in value investing has only increased.
I have understood one thing for sure – it is impossible to predict the direction of the stock markets so better not attempt the same. It is more relevant to discuss the business of a company than its stock price. If the business is good, sooner or later the stock price will reflect the same. You need to take a call on the price acting like a miser and keeping the “margin of safety”. I only hope that I maintain the sanity because you never know when is the next bull run.