In our previous two emails we said that the market looked undervalued, especially the banking sector. Premium members who bought stocks in good companies should be sitting on at least 20% to 40% gains. Free members who bought Nifty Bees ETF should also have decent 12% to 15% gains. The banking sector, as predicted, gave a spectacular return in just two months. We had added Axis Bank and Oriental Bank of Commerce to our portfolio back then.
Back in September 2012, Naveen Jindal, the CEO of Jindal Steel, bought 500,000 shares of Jindal Steel. You can see this in the insider trading report we send at night. The financial charts would have told you that Jindal Steel was a good company, although going through a down cycle. The steel industry typically moves in periodic up and down business cycles. The valuation models at that time indicated that the then-current market price of Rs 340 was undervalued compared to its intrinsic value of around Rs 470. So we bought Jindal Steel for our portfolio.
Unfortunately we bought it from a different demat account which we rarely monitor — and that played spoilsport later. In early January 2013 the price reached Rs 450, a gain of 32% in 4 months. Since we are not greedy, and the market price had come near its intrinsic value, we decided to sell the next day.
Guess what — the next day we forgot to sell, and we forgot to check it for the next 6 months. By June 2013, Jindal Steel was at Rs 250 and we were sitting on a hefty 30% loss. This is what separates serious and amateur investors. Most investors would be spooked by a 30% loss and would immediately sell, thinking it's not worth taking more loss. An intelligent investor on the other hand knows that the financial condition of the company is still good, so patiently waiting for the stock price to recover makes more sense than selling it for a 30% loss.
Two months ago the market price crashed to Rs 190 (and our paper loss was a massive 45%), which was extremely undervalued compared to its intrinsic value, so we bought it again with an average price of Rs 200. We bought more to compensate for the earlier loss. We eventually sold Jindal Steel for a small profit — but we learnt our lesson. Don't be lazy.
What can you learn from this?
- Invest in good companies. Imagine what the outcome would have been if you had invested in a bad company like Kingfisher or Suzlon.
- Invest at the right price. Always buy a company when its market price is undervalued compared to its intrinsic value. If we had bought the stock in early January 2013 at Rs 450, we would have been sitting on a spectacular loss.
- Don't panic. If you believe you have done your due diligence on the company, have faith in your decision and don't sell into a loss. You should be buying more, since you are getting it at a much cheaper price now.
This email was sent to our members on 19 October 2013.
Note — We do not offer investment advisory services.