“I hope the stock market rises again,” my friend Ravi told me as we met for dinner during the weekend.
“Why?” I asked.
“I have put in a lot of money over the last few months…that’s why!” he replied.
“Ravi, it’s good to be an optimist by nature,” I said, “But ironically, it doesn’t work that way in the stock market.”
“Why do you say so Vishal? Isn’t it a basic human nature to hope for the best?”
“Of course yes. In fact, I believe that hope is a component of a healthy state of mind, and opposite of negativity that we see all around. But then, when it comes to the stock market, hope is dangerous.”
“You see, Ravi, once you buy a stock, you obviously want it to earn you good long-term returns. But if the stock that you bought is a real value and you bought it right, all you need is the patience to sit on it with the knowledge that over time its value will be realized.”
“Yes Vishal, so even when I think I made the right decision, I would hope that it turns out to be true in the future. Isn’t that so?”
“No dear! The keyword here is ‘patience’, not ‘hope’.
As Richard Russell wrote in one of his Dow Theory letters…
Any time you find yourself hoping in this business, the odds are that you are on the wrong path — or that you did something stupid that should be corrected.
“But why do you say so?”
“Ravi, I say so because I have seen a lot of hopes ending in disasters simply because people made mistakes in buying bad businesses or expensive stocks, and then hoped that a tooth fairy would absolve them by taking the prices higher! So I’ve heard people say things like…
- A business like Hawkins is a buy at any price, because I hope it will remain a great business.
- I hope Suzlon’s business would turn around.
- I hope Reliance Power would come back to its listing price.
- I hope real estate stocks like DLF and Unitech would pay off in the long term.
- I hope this time it’s really different.
“Unfortunate it may sound, but hope is a big money-loser in the investment business. It is hope that keeps you from selling your losing stocks. It is hope that stops you from cutting your losses before they get bigger. It is hope that leads you to buy good businesses at super-expensive prices.”
“So Vishal, what do I do if not hope?”
“Make well-studied investments Ravi, and then be patient with them. Also, be willing to accept reality, especially when it’s harsh, and then be willing to reconsider your decisions with changing times.
“But please…please don’t HOPE! Avoid it! Instead, embrace patience and reality…however painful it may be.
“And finally remember this – there are many good investing strategies: buying cheap stocks, buying high quality businesses, turnarounds, top down, bottom up, to name only a few. Hope is not among them.
“I hope you understand!”
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own any stock mentioned in this post, but despite this, my analysis may be biased, and wrong. I have been wrong many times in the past. I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).