Many investors underestimate the extent to which a stock can fall.
Let’s take the example of the real estate company Unitech. The stock was trading at Rs 520 in January 2008. In January 2013, the stock was at Rs 40.
Looking at the fact that the stock crashed by more than 90% in these 5 years, many investors would have thought, ‘Aur Kitna Niche Jayega’ (How much more will the stock fall?). What happened to the stock after this humongous fall in those 5 years?
The stock fell from Rs 40 in January 2013 to less than Rs 2 in December 2020. This implies it fell more than 95% in these 7 years. A Stock that has fallen 90% from the top can again fall 90% more. Unitech is a Classic Case showing that stocks can go down to any level.
If some investor would have bought the stock at Rs 40 in January 2013 thinking that the stock is cheap and thinking “Aur Kitna Niche Jayega, Let me buy”, he would have lost a lot of money. The lesson to be learned is that just because a stock has fallen a lot does not necessarily imply that it won’t fall further. Whether the stock is cheap or expensive at a point in time depends upon the company’s future prospects.
Many stocks that have fallen a lot and continue to fall further are those with corporate governance issues, Business saving survival situations. One stock that instantaneously comes to mind from recent memory is Yes Bank.
When Yes Bank fell a lot from Rs 340 in September 2018 to Rs 150 in May 2019, many investors mistakenly believed that it was a value buy. They burnt their hands as the stock continued to slide further. From May 2019 up to March 2021, the stock again crashed by around 90%.
“Aur Kitna Niche Jaa Sakta Hain” is covered nicely by Peter Lynch, Do watch it
10 Top Dangerous things, People talk about stocks
Let us look at a few flaws in the behavior of investors that caused them to board the sinking ship of Yes Bank in mid-2019. Friends and relatives of many investors were buying the stock. Rather than questioning why everyone was buying the stock, people blindly replicated the behavior of the people who were close to them.
Several news items highlighted certain governance issues with the bank. These articles presented evidence that was contrary to the popular perception among retail investors. But, people either did not read about these issues or ignored these issues as it would have involved changing their opinion about the company. Rather than reading those news items, people blindly followed what was being done by the circle of people around them.
However, it does not necessarily mean that it is not a good investment just because a stock has fallen a lot. There have been several good stocks that have fallen a lot and have been good investments after the fall.
There have been many old economy stocks like SAIL (Steel Authority of India Ltd.), which have proven to be good investments after they have fallen a lot. SAIL was trading at Rs 280 in 2008. It crashed by more than 90% in the next 12 years. Upon seeing that the stock has crashed by more than 90%, many investors would have skipped it for investment purposes in March 2020. In the next 1 year, the stock price has grown by more than 260%.
To conclude, you should not merely buy a stock just because it has fallen a lot thinking that it won’t fall further. But, there can be some good investments in stocks that have fallen a lot.
Investors should research before investing in any such opportunity.
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