This comes a day after a sudden drop in Tata Motors shares, which saw a move from 358 to 310 in less than an hour, leaving most of us baffled for want of an explanation. Market participants traced this move to a press release from the company citing acute shortage of semiconductor chips, which is likely to hamper production for the upcoming quarter as well.
Let’s first see what does this all mean and why the title is apt for today’s blog. Whenever there is a sudden move on either sides, market experts/commentators on TV and Twitter want to justify this based on something, in order to explain to us investors as to why the market did what it did. Most of the time these explanations are meaningless at worst and an intellectualised ignorant commentary at best. Afterall, if the experts can’t tell you in 5 minutes as to why Tata Motors is worth 15000 crore less in one hour, what good are they doing to mankind. Hence, the first step is to not buy into these arguments.
Secondly, and I like to quote Samir Arora here, which is while making decisions in the event of such a sharp move, you’re best served with logic. If at 1PM, TaMo is trading at 358 and you’re happy to own it, will you be sad to own it at 310 at 2PM? Investing don’t work in this fashion. So the second step is to dig out the likely explanation as provided by market analysts and expose it to a bit of logic. The press release said there is an ongoing shortage of semiconductor chips, which is likely to worsen through the next quarter but will subside over the next one year. The company has possibly lost 30000 vehicles it could have produced.
If you just googled shortage of semiconductor chips, you’d have found that similar press releases have been issued by BMW, Mercedes, Volkswagen, and even Nissan and Suzuki. So in this scenario, the entire market has shrunk affecting all players equitably. Hence, it is not a company specific issue. Now if you believe that due to this shortage,you want to sell TaMo, you’d rather sell all auto stocks as all of them will be equally affected.
However, if you have read the press release carefully, it said there is a pending demand for over 110,000 vehicles with the company and due to availablity of inventory with dealers, they’re likely to report higher sales numbers going forward. And if you think you still want to sell, go ahead and dump your stock.
Doing your own research is essential to develop conviction in the story of stocks you own. Unless you’re sure of what you’re buying and for what reasons are you buying, you’ll forever be unsure of your holdings and make wrong investing decisions all the time. You can outsource research, but you can’t outsource conviction. Buying and holding a stock for three five seven years takes a lot of guts and if you’re so nervous buy a ten percent drop in a day, you’re best served by not owning any stocks.
Ask yourself logically, is it possible for a business to be worth Ten Thousand crores less in an hour and in case it is, and in case you’re already holding the stock, doesn’t it mean it’s an opportunity to add to what you already have? Or is it the first sign of an incipient stress which means you should get out fast.
We’re all too familiar with value traps, wherein a lot of people bought the dip, all the way to zero. DHFL, RCap, Jet Airways, Yes Bank are all fresh in our memories. Once you’ve burnt your hands in something like these, you’re very wary of buying anything on sale, again. This is why I said, unless you’ve done the hard work, developed conviction in a stock, you’ll never be able to differentiate between the two.
In order to ride a multibagger, you should be willing to hold through significant drops in stock prices. Amazon, Google, Reliance have all seen their prices correct 50-70% not once but on multiple occasions in their listing journeys. If you were the one to sell at the wrong point, you’d have missed the biggest wealth creators in the history. This is where non-financial research of a stock is important.
If you read the balance sheet, income and cash flow statements, you’ll only see in the rear-view mirror. Investing, however, is buying into the future. You should be able to visualise things three five years into the future and see if your stock fits the bill once India changes, economy grows, technologies change the way we live etc. If you can see and visualise a story that way, most of the times you’ll see it trading at cheap as the market is still not valuing it beyond the next three months. EPS estimates can only capture as much. They can never capture the tailwind a stock can have wherein it’s possible to grow 100% in a year for multiple years, if not decades.
PS: There’s a fantastic book- Richer, Wiser, Happier by William Green which has been published recently. I recommend it to all of you as it’s going to take you places you can’t even imagine that they exist. Especially, read chapter 6 on a couple of investors based in UK, Nick and Zack who hold over a couple of billions of dollars each in their individual accounts. Astonishingly, Nick owns only three stocks while Zack holds six. And they have rode Amazon for over 18 years, with all the price drops and everything in between. And what does that mean- Amazon has grown over 100 times in past 18 years, making both of these gentlemen billionaires.
This is the power of vision and courage. Rest is all gibberish.
Life is all about Compounding! 