Equitygram

Tag: stock-market

  • The Market: Where the Patient prevail

    The renowned investor Howard Marks once said, “When the knife stops falling, when the dust settles and there is absolute clarity on the horizon, there won’t be any bargains left.” This simple yet profound statement holds immense relevance for all market participants, especially during times of heightened volatility and uncertainty. Markets, by their very nature, move in cycles — periods of euphoria are followed by phases of pessimism, and the cycle repeats. However, human psychology often works against investors during these swings. Fear and greed dominate decision-making, leading to actions that are counterproductive to long-term wealth creation.

    One of the most common and costly mistakes investors make is panicking and selling during downturns, precisely when they should be considering buying. This tendency to flee the markets during corrections, crashes, or even mild pullbacks, stems from a lack of conviction in the businesses they own and an over-reliance on short-term price movements. True investing success lies in understanding that price and value are two very different things. Prices fluctuate wildly. However, the intrinsic value of a good business does not change overnight.

    To better illustrate this, consider a simple example. Imagine you are buying a tangible commodity, such as an apple, for ₹100. Over time, its price appreciates to ₹200. Subsequently, the price corrects to ₹80. Despite these price swings, the apple’s intrinsic value — its taste, nutrition, and desirability — remains unchanged. If you had previously determined that the fair value of the apple is ₹150, would you hesitate to buy it at ₹80? Most likely not. In fact, you would see ₹80 as a bargain and a wonderful buying opportunity.

    However, this clear logic seems to disappear when it comes to stocks. There are several psychological and structural reasons for this disconnect. First, valuing a stock — an intangible asset is far more complex than valuing a simple commodity. Unlike an apple, a stock’s true worth is influenced by countless variables.

    Second, humans are heavily influenced by herd mentality and the prevailing market trend. When prices are rising, optimism is contagious, and everyone wants to participate in the rally, often ignoring the fundamental strengths or weaknesses of the underlying business. Conversely, during corrections or bear markets, panic spreads like wildfire, and investors rush for the exits, even if the business fundamentals remain sound. Many investors end up selling quality businesses at depressed prices, locking in losses that could have been avoided with patience.

    This irrational behavior has been particularly evident in the Indian equity markets recently. As indices corrected and volatility increased, a large section of retail investors pulled money out, fearing further losses. These very investors were the ones buying at much higher levels when the markets were euphoric. This behavioral pattern — buying high in excitement and selling low in fear — is the exact opposite of what successful investing requires.

    Even the best businesses and the strongest stocks undergo rough patches. It is an inevitable part of their journey. However, very few investors possess the temperament to sit through the painful phases. Long-term wealth creation requires conviction and patience — the ability to hold quality companies through temporary storms and resist the temptation to react impulsively. It is during these corrections, when the market is gripped by fear, that some of the best long-term buying opportunities emerge. However, these opportunities are often missed because fear clouds rational judgment.

    The reality is that it’s nearly impossible to perfectly time market tops and bottoms. In hindsight, identifying these points seems obvious, but in real-time, they are not easy. What investors can do, however, is develop a keen understanding of market psychology — recognizing when fear has driven prices far below intrinsic value or when euphoria has pushed valuations to unsustainable levels. This understanding, combined with a firm grasp of a company’s fundamentals, can help investors act counter-cyclically: buying when the majority is fearful and selling when the majority is euphoric.

    There is a reason why the majority of participants in the market do not generate substantial long-term returns. The market acts as a wealth transfer mechanism — moving money from the impatient to the patient. Those who have the discipline to hold onto fundamentally strong businesses, even when the market sentiment is negative, are often rewarded handsomely over time. The key lies in seeing every correction, not as a signal to panic, but as an opportunity to accumulate quality businesses at reasonable valuations.

    Once investors internalize this perspective, their entire relationship with the market changes. They begin to focus less on short-term price movements and more on the underlying business performance. They stop fearing corrections and start welcoming them as opportunities to buy great companies at discounted prices. This mindset shift — from trading price movements to owning businesses — is what separates successful long-term investors from the rest.

    In conclusion, patience, conviction, and a focus on business fundamentals are the cornerstones of wealth creation in the stock market. Markets will always be volatile, and cycles of fear and greed will continue to repeat. But for those who learn to harness these cycles — by buying fear and selling greed — the rewards can be extraordinary.

  • Price, Value & Patience

    I was reading Joel Greenblatt’s The Little book that still beats the Market and it had a very important insight which is highly relevant in today’s times. With trading apps and financial influencers everywhere, it is easy to let stock prices guide our decisions. But price and value are two very different things and can have very poor correlation at times. As investors, our job is to find good opportunities that give us the most value. Figuring out a company’s true value is not simple. We guess, estimate, and sometimes get it wrong. But what if we could figure it out? What would we do with that knowledge?

    Take the example of Zomato. In the last year, its stock price ranged from ₹127 to ₹305. Was it cheap at ₹127? Was it expensive at ₹305? Could it have been cheap at both prices, or expensive at both? This wide price range happened in just one year. If we looked at its price over a few years, the range would likely be even wider. This leads us to ask:

    • How is this possible?
    • Does something change every year to justify these big differences?
    • Does this make sense?

    That’s a very wide range of movement in such a short period (the recent bull market has made it very common, but actually it is not). Looking at the price over a two to three-year period would give an even wider range. So these are the questions everyone has to ask:

    How can this be?

    Does something happen each and every year to account

    for this change in value?

    Does this make sense?

    Most of the time, these wild price swings don’t make sense. They happen all the time, but the value of a business doesn’t change that quickly. Why do stock prices move so much? Because people are not rational. They keep changing their guesses about the future earnings and value of businesses. And these guesses often change with market conditions. The most important point is that we don’t need to understand every reason for these changes. Instead, the focus should be on finding the underlying value of a business.

    The following explanation of Benjamin Graham is one of the simplest yet most important of all time.  Imagine that you are partners in the ownership of a business with a

    crazy guy named Mr. Market. Mr. Market is subject to wild mood swings. Each day he offers to buy your share of the business or sell you his share of the business at a particular price. Mr. Market always leaves the decision completely to you, and every day you have three choices.

    You can sell your shares to Mr. Market at his stated price, you can buy Mr. Market’s shares at that same price, or you can do nothing.

    Sometimes Mr. Market is in such a good mood that he names a price that is much higher than the true worth of the business. On those days, it would probably make sense for you to sell Mr. Market your share of the business. On other days, he is in such a poor mood that he names a very low price for the business. On those days, you might want to take advantage of Mr. Market’s crazy offer to sell you shares at such a low price and to buy Mr. Market’s share of the business. If the price named by Mr. Market is neither very high nor extraordinarily low relative to the value of the business, you might very logically choose to do nothing. In the world of the stock market, that’s exactly how it works. In short, you are never required to act. You alone can choose to act only when the price offered by Mr. Market appears very low or extremely high. Graham referred to this practice of buying shares of a company only when they trade at a large discount to true value as investing with a margin of safety. The difference between your estimated value per share and the purchase price of your shares represent a margin of safety for your investment. If the original calculations of the value of shares turns out to be wrong due to bad market conditions, some regulatory change, new competitors or a failure in the business model, the margin of safety in the original purchase price could still protect us from losing money. In fact, these two concepts—requiring a margin of safety for your investment purchases and viewing the stock market as if it were a partner like Mr. Market— have been used with much success by some of the greatest investors of all time.

    The summary is that stock prices have wild movements all the time and that does not necessarily denote a change in the underlying value. One of the best stockpicking skills is to find the intrinsic value of a company and picking good bargain buys. But with too much information floating around these days and media’s easy reach, everyone is influenced by the overflow of information and we have the urge to constantly buy and sell everytime. Though understanding the true value of a company and buying it at the right levels is difficult, what is even more difficult is to act only when the time is right. The markets are crazy most of the time but only YOU have to decide when you have to act. Patience is a virtue which is highly rewarded in the market.