When you start investing – especially in direct equities, you tend to do some research and some reading into future events. Based on YOUR interpretation of the future events, you need to plan your future moves – career-wise and money-wise.
Let us say it was in 1985 you started investing and were following one big company. You were told the following:
– it is a large company
– it is a well diversified company
– it attracts good talent – and has the ability to attract, nurture, and retain them.
– it is a proxy for the India growth story
– it has tons of real estate which could be sold at various stages so that it can make tons of profits on the same
SO YOU DECIDE IT IS A GOOD BUY. You buy lots of this share and over the years you have made nice amounts of money on this stock.
However as time goes by (and you are more mature!) you realize the following:
– the current MD is a thief and makes tons of money in big deals
– it is a company run by psychopants
– it is really well diworsified and lacks big ticket ideas
– it still attracts good talent but the Leave after Training
So what should you do?
Sell the share and go short so that you can make a lot of money when the share crashes? NO. NO. NO.
Cycles about companies can run much longer. For example this fictitious company can be close to the powers that be and get good big contracts. Whether these projects make money or not for the company, the market perception will not change immediately. The company will have some contracts / products which will still be giving it good profitability. The other competitors may be worse managed.
So if you think that all the bad news will hit them in 3 years, you could be wrong. It may hit them in 30 years. Or maybe 10 – you could be completely wrong. Remember the old saying ‘The market can remain Irrational far longer than you remain solvent’.
Similarly if you travel around the world you realize that the costs of doing business in Europe and USA is so high that EVERYTHING could be outsourced to Asia. So does it mean you go short on US and Europe? And long on Asia?
Again, not so fast. Europe and US are the powers – and they will not give up their powerful posts so easily.
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