I find a lot of Mrs. and Mr. Right these days in the stock market – people who bought a few stocks in the past 6-12 months and have seen all or most of them sky-rocket 100-200% since then.
For instance, a schoolmate who is a housewife with no business dealing in stocks, has started recommending trading tips in our batch’s online group, “because” she is getting her price calls right!
Then, someone wrote to me yesterday “praising” how my “recommendations” like BHEL, Engineers India, Crompton, Voltas, HMVL and Tata Motors have finally been “successful” as they have risen sharply in prices.
This very person had written a hate mail to me last year when some of these stocks – or let me say, their prices – were down in the dumps. 😉
Such is the way we behave as investors.
My observation is that most people out there in the stock market – maybe, including you – judge the quality of their investment decisions by one single factor – the short-term price movement of the underlying security.
Image Source: Yahoo Finance
So, if you are pitched a stock to buy by someone – which is a bad business – and the price of the stock moves up say 30-40% during the next few weeks for whatever reason, you will be more than willing to buy into the next tip from that person.
On the other hand, if the same person asks you to buy a stock – which is a great business – and the price of the stock falls by say 30-40% during the next few weeks for whatever reason, you will avoid him and his tips the next time.
So the Gujarati saying – “Bhaav Bhagwaan che!” – seems to be the ultimate truth for most stock market investors. The stock price is treated as the most sacred thing, and business fundamentals are relegated to the backseat.
In one recent article on Gurufocus, the author calls this fixation on short-term stock price movements to judge performance as a “…predictable irrationality caused by a combination of reinforcement and social proof.”
The author writes…
We talk about how to sharpen our analytical skills and how to value a business very often but we don’t talk enough about how to avoid the folly of being misled by the powerful irrational movement caused by social proof. This predictable irrationality is almost ubiquitous. I’ve known investors from all over the world and we exchange ideas on a regular basis.
For a while I was befuddled by the following behavioral pattern: I would receive congratulatory emails from my friends because the stock I wrote about moved up but very few of them wrote me congratulatory emails when the thesis of my investment was gradually holding water yet the stock price remained tamed.
How Do You Judge Your Investing Success?
Warren Buffett says…
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
For all the reasons we love Buffett and his teachings, how many of us would apply this thought in our investing process?
A lot of people are asking me these days if they should sell their stocks because the prices have risen sharply over the past few months and they don’t want to miss out on profit taking.
These people seemingly assume that they would be able to deploy their profits as successfully – read, in stocks that would rise in prices – as they did the last time.
If you are also thinking on these lines, I will repeat what I wrote in one of my recent posts –
If you own good quality stocks and want to book profits after last few months’ rally, don’t! Think in terms of the wealth these can help you create over the next 15-20 years, instead of short term profits you have earned from them in recent times.
Stop taking cues from the stock prices. Start focusing on business fundamentals.
Ask yourself this question – How do I judge the success or failure of my investment decision making?
If the answer is “stock prices”, yours is a wrong yardstick of performance, my dear friend.