Don’t Chase Stocks
Very often, we see investors and traders making the classical mistake of committing good money after bad in the hope of optimising their cost profile and thereby ‘averaging’ the price by enhancing the quantity of the particular stock that they are targeting. A large part of this trait is psychologically driven from the emotion of feeling trapped on the wrong foot w.r.t. entry at the wrong price or the unintended stock in an intended sector or some misplaced recommendation. What this impacts is three things:
a) it is inefficient in terms of time value of your money
b)it has a reasonable possibility of turning into a value or just a stagnant trap
c) most importantly, it distorts the idea of asset allocation & portfolio re-balancing by compelling you to go after it
Lets address the first issue, that of Theta or time value of money… This is specifically hurtful in a raging bull market where there are multifarious opportunities which are substitutable and more efficient in terms of short term allocation. This missed opportunity purely increases your opportunity cost and the sharper the rally, the higher this cost becomes. In fact, I would even go to the extent of saying, that at times its even worthwhile to cut losses and re-enter a different stock with the reduced proceeds (impacted from the fall in stock value). Even then, the probability of recovery and even crossing over to gains is reasonably high. This cost is by far the least noticeable and most onerous, draining your portfolio, one day at a time, hiding in plain sight, yet invisible. Its almost akin to remaining engaged in a completely futile battle and missing the woods for the trees.
Moving over to the second issue, that of a stagnancy trap. I shall illustrate this by way of a very hackneyed example, ITC. Over the last 3.5 years, even the most loyal creed associated with this one, seem to be giving way, save for the brief period towards the end where it is seeming to stage a recovery. The worst part about this is that its fundamentally unblemished and in fact has been taking enviable strides in the FMCG space with a tremendous cash generating ability
The second example I’ll cite is a little more obvious and more recent, that of GMM Pfaudler
The crash happened on account of the Promoter introducing a buyback at almost half the stock price in the month of September and since then it has never recovered. The manic rally that it saw from sub 1000 to 6000+ in almost a year, lured many new investors into it, specially smaller retail ones who now remain trapped in a wide range of 20–50% downside
While the example of ITC has been long debated to be a ‘value trap’, that of GMM is still the latter, until further evidence of future trajectory emerges
Finally, the last and the most important factor of portfolio rebalancing and asset allocation. This one not only takes you out of your remit of the very idea of a Core and Satellite portfolio within Direct equity, but also distorts the balance between your overall Equity/Debt/Gold/$/Real Estate allocation. The foundation of a disciplined portfolio is to adhere very strictly and dispassionately to the concept of asset allocation in-line with your risk tolerance and appetite. If there is a disproportionate rally, trim your weightage within the equity portfolio. If there is a fall, identify the nature of the fall before doubling down on it, specially in a Bull market, because the first two caveats in this article will make it exorbitant for you otherwise
Needless to say, its an absolute ‘no-go’ area…
