The years 2007-2011 have been truly unforgettable for most investors globally. During this period, we not only saw our markets surging to new highs but also some of the worst financial turmoil ever. Markets surged steeply to new highs during 2007-08 and consequently enticed millions of investors looking for some quick money. There are a lot of investors who had bought into Indian equities, global mutual funds, commodities and real estate at those high prices and haven’t recovered even their initial investment till date.
Since the onset of financial crisis, the most common phrase that I have come across from investors is “used to be”. The phrase usually referred to what their investment used to be pre-crisis, followed by the current market value. It is a common phenomenon to conceive a target/goal for any investment that we make. Once the goal or target price gets realized, we tend to book profits or re-set the target based on our view on its potential movement in the future. The picture looks rosy until our investment fetches us what we bought them for, but the problem arises when it doesn’t fetch that much. In such cases, investors tend to wait endlessly until the investment meets its pre-set notional target. As time passes by, the investor finds himself in deeper crisis by seeing his holdings depreciating further and becomes a testimony of the opportunities he has missed—just because the investment didn’t recover to what it “used to be”.
Sachin Maniyar, a shrewd finance professional based in Pune, learned the above facts the hard way after he bought the shares of realty company DLF Ltd, following the tips of his broker to buy at Rs 1,000 levels in December 2007. Maniyar decided he would sell the stock once it appreciates 10% to Rs 1,100. With the onset of financial crisis, Indian markets corrected by more than 55% in 2008. Realty was the worst hit sector with the sector’s stocks falling 80% on an average. DLF Ltd fell to the extent of 86% during the crisis and touched Rs 140 levels. Maniyar decided to hold on to the stock till it recovered back to his target of Rs 1,100. It has been close to four years since his investment and the stock is yet to surpass even half of Maniyar’s buy price.
The fate of many mutual fund investors was on similar lines. There were many who got invested into mid- and small-cap funds to ride the rally that caught steam in 2006-07. Mid-cap stocks were heavily beaten in the following year and so were mid-cap funds. There were a lot investors of JM Financial Mutual fund that were stuck to the notional profit expectations throughout the crisis and are still waiting for their fund to recover. Had they switched their holdings into some highly rated mutual fund scheme with a style similar to that of their JM fund, they may have made profit by now.
At such instances, it is essential to understand that stocks don’t understand our personal goals or estimates. Stocks move according to their demand/supply dynamics influenced by change in fundamentals, new information about the company or any corporate action. So if you believe that the stock would reach “your” goal or break-even based on your expectations and without any change in the fundamentals of the company, you are probably aiming in the dark. Here, it is important to acknowledge that the decision was mis-timed and that there is a crisis that can last for the coming year or two. A stock that has fallen 50% in the crisis would take a rally of over 100% to reach back at the pre-crisis level. At that point, one should then analyse whether there has been any improvement in the fundamentals or outlook of the stock that can drive the stock price higher. If there aren’t enough convincing reasons, it’s prudent to move on and grab the best opportunity that one can spot at that point of time.
Whether it be stocks, mutual funds, realty, or any of your other investments, it is always difficult to let go of our expectation from the investments, but it is equally important to realize that markets follow fundamentals not our break-evens.
Hiren Dhakan is associate fund manager, Bonanza Portfolio.
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