I decided to write today because I felt myself succumbing to temptation. Just because a security rather undervalued and the corporate governance is top-notch, does not mean that 1- the future of the sector is bright or 2- one should chase the stock on its upward descent.
1. Even though I might make money on this particular investment (I will call it SP), the angle to it is that of a short-termish gain. That of a 1-2 year horizon. I want to make it a rule, that I will get into a company only if I see some visibility to the sector 10 years into the future. There are large potential risks to sectors which see drastic changes in the medium term future. In 2007, could Dell have foreseen the disruptive changes to the PC/ laptop market because of tablets? It was in the USD 20-28 range and now has been struggling in the mid 10s.
Of course, changes are wonderful. A retailer will have to change its mode of operations because of e-commerce but the essence of the industry lies in getting the right product in good condition to the customer while keeping the customer experience great. So, a Crossword or Landmark will evaporate but a STAR Bazaar may not. It is also difficult to replace cola drinks or coffee or tea or pesticides or financial services or automobiles. And here I lead on from my previous post; in order to cope with change, how must an organisation change its core product/ service offering? A Kotak Bank will not need to change as much as a Tata Motors would have to in terms of resources that are required to conduct that change.
2. This is primarily related to psychology. "I don't want to miss out on this opportunity. Ok, I was timid at first, but let me buy in at a 15% premium because it wont make that big a difference."
Sadly, buying above your comfort zone gives rise to an erosion in one's margin of safety. At times, it is prudent to sit back and let others fight it out over getting shares of a company; The stock may soar higher or the dust may settle along with the price. There are many opportunities in the market. Always keep your eye on your downside.
1. Even though I might make money on this particular investment (I will call it SP), the angle to it is that of a short-termish gain. That of a 1-2 year horizon. I want to make it a rule, that I will get into a company only if I see some visibility to the sector 10 years into the future. There are large potential risks to sectors which see drastic changes in the medium term future. In 2007, could Dell have foreseen the disruptive changes to the PC/ laptop market because of tablets? It was in the USD 20-28 range and now has been struggling in the mid 10s.
Of course, changes are wonderful. A retailer will have to change its mode of operations because of e-commerce but the essence of the industry lies in getting the right product in good condition to the customer while keeping the customer experience great. So, a Crossword or Landmark will evaporate but a STAR Bazaar may not. It is also difficult to replace cola drinks or coffee or tea or pesticides or financial services or automobiles. And here I lead on from my previous post; in order to cope with change, how must an organisation change its core product/ service offering? A Kotak Bank will not need to change as much as a Tata Motors would have to in terms of resources that are required to conduct that change.
2. This is primarily related to psychology. "I don't want to miss out on this opportunity. Ok, I was timid at first, but let me buy in at a 15% premium because it wont make that big a difference."
Sadly, buying above your comfort zone gives rise to an erosion in one's margin of safety. At times, it is prudent to sit back and let others fight it out over getting shares of a company; The stock may soar higher or the dust may settle along with the price. There are many opportunities in the market. Always keep your eye on your downside.
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