“I have worked out the Value. How should I decide the right price Now”? – A question from our reader

Saturday, 1 September 2018

“I have worked out the Value. How should I decide the right price Now”? – A question from our reader

Greetings from Hitesh! We started our education series with Unconventional Thinking, then we moved on to Inefficient Market, then to Value and now the most important questions – PRICE V/s Value. Let me deal with the same.

Starting Point: -

For a Value investor – price is a starting point. Time and again it has been proven that no asset is good enough that it can’t become a bad investment if bought at a high price (those who bought Infosys at Rs.16000 in 1999 or L&T at 4400 in 2008 knows what I mean). There are few assets so bad that they can’t be a good investment when bought at cheap enough.

Infosys had a P/E of 125 in 1999 and it fell to 25 post 2001. It means that prices have gone down by 80%. Larsen came down to 1500/- in 2009. So, buying at a right price is a major decision.

Buffett says that we buy at such a price that we don’t have to worry for selling the same. It means buying price is the deciding factor for your profit.

To understand the right PRICE you must know what price comprises of in short term and in long term.

Buffett says in the long run price is a slave of business performance. It means if the business performance is good, prices will keep on adjusting the same.

But in the short term there are two factors which affect the markets – Psychology and Technicals. Technicals are non-fundamental factors which affects the demand and supply in the short term. Say market falls due to some external factors and investors get MARGIN calls and this takes the shares prices further down. Say mutual fund gets redemption pressures and they need to sell shares at any price. These also takes the prices further down. Now, these factors have nothing to do with the company fundamentals.

There is nothing better than buying from a forced seller as he is not interested in bargaining with you. Since buying from forced seller is the best thing in the World – you need long term capital or holding capacity and psychological strength. Psychology is the most important thing when prices are falling like 9 pins. It requires lot of inner balance to buy at such time.

Psychology is of critical importance and it is the most difficult to master. Buffett is sitting on huge cash pile of more that USD 100 Billion since last year and he is not investing. Seth Klarman is also sitting on huge cash. They keep on waiting for years for right kind of price.

My experience with NORMAL guys tells me that they feel insecure if their money is lying idle and they are not buying any shares. They want to buy something or the other.

My experience with lot of investor friends suggest that they often talk about LONG TERM but all they want their share prices must move fast!! If the prices do not move and other shares are moving, they will doubt whether they have done right thing by buying XYZ shares. This is 100% against VALUE INVESTING principle.

Buffett has often said – “I am not right because market agrees with me and I am not wrong because market do not agree with me. I am right because my calculation shows that I am right.” This is TRUE VALUE INVESTOR’s attitude.

So, you need to have the support of Technicals and Psychology along with the VALUE to buy a stock.

What NEXT?

If you follow above two steps along with accurate value, you will never have to feel sorry for investing in stocks.

I wish you all a SUPER SEPTEMBER.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.