First a disclosure – I own Bharti Airtel in my portfolio, as I’d disclosed via a post in March.
I had bought the stock in October 2009, at an average price of Rs 301. Given the fall the stock has seen over the past few months, which has been compounded by continuous weak results from the company, my investment is down almost 13%.
So what’s my next course of action with respect to the stock?
What to do with Bharti?
When a stock crashes to below your purchase price, there are three distinct actions you can take:
- Sell the stock at a loss, if you don’t have the stomach to withstand losses, or if you realize that your original investment was a mistake, or
- Buy more, either to average your costs lower, or when you have a great conviction on the company’s long term potential, or
- Do nothing, either because you are frozen with fear and don’t want to sell at a loss, or you don’t have cash to buy more of the stock.
So which of these three actions am I taking with respect to my investment in Bharti?
First, my brain scan
Before I talk about my next course of action for Bharti, let me understand (and publicly announce) the biases I may be suffering from looking at the continuous fall in Bharti’s stock price.
The reason I am doing this is because I believe you will easily relate to this, as you might have faced a similar situation with a falling stock in the past.
So here are the “some” of the many biases that are gripping me with respect to Bharti as of now, and how these can lead me to make an incorrect decision…
1. Recency bias
No doubt, there’s a lot of bad press Bharti is getting these days, like…
- Competition in telecom sector is getting tougher
- Regulations are getting complex
- African business remains under pressure
- Balance sheet is stretched
- Profits are under pressure
Don’t get me wrong, but these are some harsh realities the company is facing as of now. Add to this, the business media is doing a great job of plastering this across, thus adding to my woes as an investor.
Wherever I look, I can see fingers pointing at Bharti as if the company and its stock are going to zero!
Here is what Nassim Taleb wrote in his Fooled by Randomness…
People fail to learn that their emotional reactions to past experiences (positive or negative) were short-lived – yet they continuously retain the bias of thinking that the purchase of an object will bring long-lasting, possibly permanent happiness or than a setback will cause severe and prolonged distress (when in the past similar setbacks did not affect them for very long and the joy of purchase was short-lived).
Cut to my emotion just a few moments before I bought Bharti (or when I’m buying any stock) – “This is a great stock and if I buy it now, good things will happen to me.”
Now when I see the stock crashing as if there’s no tomorrow, I exclaim – “God, why only this stock? This slide will kill me!”
If you read the two statements carefully, you would notice that I expect both the feelings of ecstasy (while buying the stock that is expected to rise) and despair (while seeing the stock fall below my purchase price) to be long-lasting…permanent.
This is exactly the reason most investors (including myself) are so prone to make knee-jerk reactions as soon as things take an unexpected turn against what they expected.
In case of Bharti, the bad news all around might lead me to either of these two knee-jerk reactions:
- Buy the stock just because it has fallen and I want to average
- Sell the stock because I can’t take the loss anymore
There’s no third option of “holding” the stock because then I won’t be reacting to news, which is out of context here.
So the recency bias can lead me to an incorrect action with respect to my holding in Bharti.
2. Availability bias
Accompanying this will be the availability bias, which may lead me to over-estimate the likelihood of something that is more available in memory.
Since there is so much bad news available for Bharti as of now, I might end up over-estimating their impact on the company…even when I’m a long term investor.
The vivid images of “Bharti’s stock tanking by 10%”, its “profits crashing by 37%”, “interest costs jumping” etc. etc. might capture my mind and again lead me to “sell the stock before it’s too late”.
On the contrary, just the fact that “the stock has fallen to its 52-week low and being contrarian pays a lot” can lead me to buy more of the stock…again “before it’s too late”.
3. Overconfidence bias
A common thought I’ve had when a stock has fallen below my cost is – “I know the story, so I must not be worried. I will continue to hold on whatever everyone is saying. In fact, I’ll buy more.”
At other times in the past, I’ve thought – “I’m sure something is wrong with this stock’s story, or why would everyone be dumping it? I will sell it right away!”
You can notice my overconfidence at both these instances, right?
In the first case, I am confident what I am doing. In the second, I am confident what others are doing.
But is it my confidence or overconfidence?
No doubt it’s overconfidence, or why will I want to act immediately on my (or others’) thoughts and actions, instead of doing the hard work of finding out what’s right and what’s not!
So my overconfidence might also lead me to incorrectly judge the situation, which will lead me to making a mistake (which I will only realize later!) of either buying or selling the stock.
4. Anchoring bias
In investing, a stock’s past price never dictates where its long-term future lies.
What matters for you to decide whether a stock is a buy or sell is its current price in relation to its current intrinsic value.
In the same way, getting anchored to a particular price from the past can be dangerous to my current action and future profits from Bharti.
Let me help you with another example.
Assume I bought Bharti some time back at an average price of Rs 300 per share. The stock went up to Rs 350. I had some spare cash to invest but I avoided Bharti because the stock was up 17% from my original price.
The stock rises further to Rs 400 because the business is doing well. While I’m happy for my original investment, and still have some spare cash, but I don’t invest more in the stock because it is now 33% more than my original buying price.
Notice that I’m anchored to a price of Rs 300 here, and all my subsequent decisions are based on this price, instead of any additional research on the business (to find out the reason for the stock’s rise).
The story doesn’t end there. From Rs 400, the stock falls to Rs 360. Now I buy into it, because my new “anchor” is Rs 400 (and the stock is down 10% from that!). It falls further to Rs 320, and I buy more, anchored to Rs 360.
Then, as the business deteriorates (and I’m not aware of that), the stock falls to Rs 275, below all my purchase prices and especially below my original cost of Rs 300, which is now my strongest anchor.
This is where the hell can break loose, and might lead me to again take a wrong decision with respect to my holding in the stock.
Replace this assumed scenario with reality, and there’s a great chance that I might succumb to the anchoring bias.
5. Confirmation bias
Now I am very sad seeing my losses and want to sell my Bharti stock at all cost. But I am still looking for a final validation of my thoughts.
So I can only hear people who are recommending a “sell” on Bharti. As of others who are still holding a positive view on the stock, I not only avoid them, I cast aspersions on then thinking capabilities.
Alternatively, if I am itching to buy more of Bharti because the stock is down, and I’m a born contrarian, all I will look for are people who are advising a “buy” on the stock. As of others who are recommending to book losses on the stock, I will simply shun them.
The point is that I am, as a potential buyer or seller of Bharti’s stock, looking for someone to confirm my view. Another dangerous bias I might fall into!
6. Loss aversion bias
While looking at Bharti’s falling stock price, my next decision has a great likelihood of being dependent more on the loss I am incurring instead of the “risk” I will be taking by buying more/holding/selling the stock.
As a typical investor, I would be bent on avoiding any kind of loss.
One way I can do this is that, despite seeing any red-flags in Bharti’s business (in case they exist), I would avoid selling the stock because “I’m sure this will rebound!”
Then, I may even buy more of the stock to average down my cost and thus “reduce my losses”.
Here is where I will also suffer from the “mental accounting bias” by convincing myself that – “By lowering my average cost, I will reduce my percentage losses in the stock.”
This is like saying that when I lower my average cost from Rs 300 to Rs 280, my percentage loss at the current price of Rs 260 will drop to just 6%.
I simply ignore the fact that if I was incurring Rs 10,000 loss in Bharti earlier, my loss would remain the same even after I average out! So the “amount of money” I’ve burnt in Bharti will remain as it is (if the stock were to remain at the current levels).
But then, you see, all I’m trying to avert is a “loss”…whether I avoid selling the stock at a loss or average out my cost!
“Vishal is a house full of biases!”
You might be longing to believe this by now, isn’t it? By the way, you are right. Like any investor, even my brain is not 100% insulated against behavioural biases.
It contains the same chemicals that run through any human brain.
But then, I’ve heard that there’s a great power in publicly announcing your imperfections, as that pushes you to take notice of them.
When I am looking at my behaviour in front of a mirror, however foolish I may be acting, I will always think myself to be a superstar. And then I might suffer from even great amount of biases. But when I let someone else know about my eccentricities, I may try to mind my behaviour better to avoid looking foolish (so here is my selfish reason to write today’s post :-)).
Anyways, that is also what I expect to know from you. Let me know the biases you face in a situation like I’m facing with Bharti as of now.
How have you behaved in such situations in the past? What was the reward/punishment of your subsequent action?
Okay, enough! What am I really doing with Bharti?
I know there are a lot of you who are cursing me by now for not talking about my stance on Bharti.
So what am I really doing with my investment in Bharti?
Well…I’m doing nothing!
Saying it the other way, I’m holding on to my investment in Bharti.
I am not buying more because I’ve already allocated my savings and thus have no excess cash to add to this stock as of now.
I am holding because I’m convinced about the long term business of Bharti, despite the underperformance it is seeing currently (or over the last 10 quarters, as business media is shouting out).
My reasons for the same haven’t changed much over the last few years – competition was as tough then as it is now, and regulations were as complex then as they are now.
Of course, the pressure on profits and additional debt on the balance sheet due to the African acquisition has led me to lower my intrinsic value estimates for the stock, but that might change again in the future when the company gets back to better P&L performance and a better balance sheet (which I believe Bharti’s management is capable of doing).
All in all, my call on Bharti is based on my view of the management and its capital allocation skills (the return on capital, though low as of now, is still best in the industry).
Plus I have a great faith on the company’s last-mile connectivity with 260 million consumers in India. Which other company in India (except maybe HUL and ITC) can boast of such a close connection with consumers?
While looking at my investment in Bharti, I am looking at the opportunity cost of my investment in the company. In staying invested in Bharti, what am I missing on in terms of better quality businesses that have the capability to be highly profitable (as Bharti has shown in the past despite high competition)? Not much, I believe.
Of course, I may be proved wrong in the future and Bharti could turn out to be a mistake, but then as someone told me about an important rule of human life – “There are no mistakes, only lessons.”
What do you say?