June 8, 2010

Cooling your enthusiasm

The previous post had some questions on how to handle over-optimism on a stock, especially when one is analyzing it for the first time.

I think it is human nature to be over-optimistic during bull markets and pessimistic during the bear phase. Even if you think you are immune to it, I personally think there is some impact of the surrounding environment. I have seen in my case that my fair value estimates are on the lower side when the market is dropping (being too conservative) and on the higher side when the markets are shooting up.

The first step in managing this situation is to acknowledge that you are not different from others and could be getting impacted in the same manner. If you don’t acknowledge the problem, then there is nothing to resolve.

I typically remind myself of these points when faced with rapidly rising or crashing markets

Cannot predict markets
I cannot predict the markets. Period! I cannot divine the future and care two hoots if others can or cannot. If that is the case, then my decisions are based on what I know as of today and not what may or may not happen. As a result, I have lesser tendency to beat myself up for a decision at a later date.

The next logical point is that the future may prove me right or wrong. However if I make rational and intelligent decisions, luck evens out and I should do fairly well. Till date, I have seen that happen.

I try to note down my thoughts and reasoning when buying or selling a stock. This helps me in checking back on my thought process at a later date.

Cooling period
I have also accepted the fact that I am like everyone else – nothing special. So I will be swept by emotions from time to time. The best antidote to it is to have a cooling period when making a decision on a stock.

I start analyzing a stock and if I get too excited, I will create a small position to temper the urge or itch. I leave the analysis for a few days or weeks and will then come back to it with a fresh mind. A lot of times I have been surprised with my decision (what was I thinking!). The downside is that during a bull market, such an idea can run away from you. I think that’s an acceptable risk.

Search for negative opinion
I try to force myself to look for negative information which goes against my thesis. This helps in countering the optimisim and hopefully improves the analysis.
There are no magic bullets or set formulae in managing emotions. It comes down to our individual makeup and what works for us.

Watch list of stocks
I am analyzing the following stocks these days
Noida toll bridge
Facor alloys
HDFC bank
Patel airtemp

And a few others. The idea of analyzing these stocks is to understand the business and calculate their fair value. I have been building a list of ideas with my estimates of fair value. Most, or almost all the stocks are not in my buy range. However it is important to analyze these stocks in advance, so that when the opportunity comes, one can move fast and create a decent size position


Navjot Kashyap said...

Hi All,
If anybody of you wants the data of all BSE companies[3994 till last count],send me a mail at kashyap9_navjot.The id is on yahoo server.The data contains market cap,PE and Return on Equity along with the dates used to calculate it.I have put it in csv format,so that it can be opened in excel and used in whatever way you wish.I have used money.rediff.com to get data.I will appreciate if you can give suggestions about what more to add and how to make it better.But,I can only get data from rediff because writing code is too much pain as well as complicated task.
Hope you appreciate the effort.

Siddharth said...

Hi Rohit,
What is your opinion on using checklists to stay from getting carried away or jumping onto a stock. I am sure there must be ways to design checklists that factor in emotions & psychological aspects which can help curb our enthusiasm if not eliminate it. Do you use checklists in your decision making process??

Vic said...

Hi Rohit,

This post is a perfect timing. Would it be possible for you have a quick glance at the following ideas (don't worry..these are a Value pick..not hot tip :-):

Balkrishna Industries
Gujarat Reclaim
India Motor Parts
Shilpa Medicare
Swaraj Engines
Pratibha Industries

Again, the idea is to anaylize them and buy only when the price becomes attractive.



Anonymous said...

Hi Rohit:
A counter argument is of "paralysis via analysis". Its a good argument to keep learning about companies, its business model and making a judgement on its fair value - to act when the price is right.

I also feel one can achieve a lot through analysis when one is enthusiastic by immersion - reading up as much as possible about the company when one is positive on its prospects/potential - though we would need the work to be complete and accurate to make a call.

With small companies my worry is always about the knicks involved with the management/founder group -which takes time to assess.

I would like you to take a look at a company that may meet much of the value criteria. Its called "Vinati Organics". Would appreciate your thoughts.


Anonymous said...

hi rohit,
i think the indian gelatin industry is looking cheap compared to its fundamentals-nitta gelatin,india gelatin and natural capsules, even for yield hoggers!wud luv to hear ur thoughts
p,s pls take a look at a T group stock teesta agro it has cash per share of 20 crores and a mkt cap of 5 crores!

kudva said...

If you are willing to pay a little for quality consider Bluestar rather than Patel's Airtemp.

Rohit Chauhan said...

Hi siddharath
I use checklist to the same. you can look at my valuation templates for that. At the same it is still not easy to avoid the biases even with a checklist


Rohit Chauhan said...

Hi vic
i will add these companies to my list and will post when i analyse them.

hi deepinsight
you points are valid. there is no hard criteria for analysis/ paralysis. how does one decide when the analysis should stop ? thats not easy.
i personally follow a simpler method - some companies just cannot be valued or analysed by me ..for ex: telecom companies. i put them in the too hard pile and move on

the same is also true sometimes for small companies

i will have a look at vinati organics


Rohit Chauhan said...

Hi kudva
bluestar holds a special place for me. was one of my real successful picks ..bought in 2002 and sold in 2007.
inspite of all the warm and fuzzy feelings, it is not cheap enough.
there is another option - not to buy bluestar and patels airtemp both. just wait and watch and pick whichever appears undervalued and more attractive in time