When I was in high school there was an exercise in which the whole school participated (not sort-of which gets you a memento). At the end of the lunch break three bells rang: the first one indicating the lunch time was over followed by 2nd sound at which whole school would stop in their position instantly like a statue. It was a hilarious moment to see, children making funny positions with their mates, others falling on the ground as if they were in the middle of the fight with funny faces. The seniors, didn’t caring about this would go on with their movements as if they are not afraid to break the rules (including me) or the reverse can also be said, they were afraid what others might think of them (social proof) if they would do the same. Well, the purpose of the exercise was to slow down our senses for the moment and take a look around and observe what is happening all around us. It was more of a mental exercise than a physical one. The world is moving so fast that we rarely pause for a moment and think what is happening and investment is no exception. That was 8 years ago. How all this connects to the investment in particular and life in general? Investment is like that, if you don’t understand the information you already have, you will be flooded with it by searching for more.
It’s relevance has very much to do with the returns in the investment field. With all the marvels in the information technology that are supposed to make the information availability faster (speed) and with more ease than before (quantity) to rule out any insider advantage to the information and bring transparency, things have gotten much difficult in totality. We are more distracted than ever before with continuous bombardment of information. Simplification too, has a threshold limit. To borrow a phrase from Michael Bhaskar’s book Curation : In fact, we have solved it (information scarcity) so well that there’s a new kind of problem: not information poverty, but information overload.
Gekko very clearly says it but didn’t say that the information he was talking about was curated information.
The logic behind superior investment results is simple, yet majority either doesn’t get hold of the idea or it is too incomprehensible for them. There can be innumerous other explanations for this but, that is not our concern here. Back to basics, superior investment results comes from information. Information has value in two ways: (1) Information that has not reached to many people and will have significant affect on the business (Insider information) and (2) Not everyone has access to the insider information, so what special insights we can develop from the information at our disposal. This article is about the second option by taking an example.
As it happens quantity matters but, to the extent it doesn’t lead to over analysis. It doesn’t require much empirical evidence to show that there is an inverse relationship between quantity and quality of information. More precisely said by the 19th century play-writer Douglas William Jerrold: Quality, not quantity is my measure. We all like to think that the more information we include in our analysis the better will be our decision for investment. Neurologically, information is addictive. Information is the most important commodity, but what if each extra information reduces rather than increases the quality of decision making. This question was raised by Stanford and Princeton university scientists in a fascinating study titled On the Pursuit and Misuse of Useless Information. Following is an observation from the study:
Decision makers often pursue noninstrumental information—information that appears relevant but, if simply available, would have no impact/less impact on choice.
The case explored here are motivated by the assumptions: (a) The pursuit of missing information can lend greater weight to that information, relative to the attention it might have received had it simply been known from the start; & (b) the longer the time to clear the uncertainty, higher the weightage is given to the missing information. These two factors are mutually enhancing.
The Curious Case of Vakrangee Ltd.
The company has been in news very recently for rumors of stock manipulation by the promoters group. Here is company that just before the crash (29-Jan-2018) was a total rage among investors. There were all sorts of media reports saying how the company has been a wealth creator for its investors over the last 10 years and how it’s earnings will double/triple over the years. Then, came the tide and everything was turned upside down. A market analyst was quoted as saying (after the alleged article came out):
“How the company makes money, God only knows. It is a case where promoter himself gives money to people to purchase shares of his own company. Perception of Vakrangee is bad in the market, but surprisingly, the stock prices are going up without any fundamentals and big names are seen in its shareholding list.”
All this was due to a article in a regional Mumbai newspaper claiming SEBI investigation into the company. Almost overnight the company went from wealth creator to wealth destroyer falling as much as 70% within a span of 32 days. Brooding one’s mind over this fiasco should make anyone question: How is it that a near 50,000 crore company at its peak got reduced to 15,000 at its low within a period of 32 days? Did, its fundamentals change or the business was already in the sinkhole? The answer is NO! The reason is above two assumptions. As per the first assumption, the pursuit of missing information (some HNI’s even started their own private investigation) lead to downfall of the price which was more than substantiated. The information was relevant but non-essential for the price fall. During the uncertainty period more weight-age was given to a single information than all other information. I am no researcher but relying on the research, I can say that: had this information been available from the start, things would have been quite different. Try answering the following question:
Q: For sometime you have considered buying into this company but couldn’t due to high price. The company is good with great ROE, Sales CAGR & Profit CAGR for the last 10 years with reducing debt on the verge of becoming debt free with great future prospects. The price is down 50-70%. However, there are rumors in the news about some price manipulation in the price 3-4 years back by the promoters. You will not know until the end of the week whether the rumors are true of false. Do you
a) Decide to buy the stock during the week?
b) Decide not to buy the stock during the week?
c) Wait until the end of the week, to decide whether or not to buy the the stock during the week?
If you choose (c) in the above question, answer the following:
It is the end of the week. You learn that the rumors are true and the promoters has been charged by SEBI. Do you
a) Decide to buy the stock?
b) Decide not to buy the stock?
I don’t have the resources to conduct the survey ( being a teacher would have helped) hence, I have no actual results for the questions. But I rest my answer on the rationale that, to any savvy investor it was clear enough that after 50-70% fall in prices based on a rumor which even if was proved right couldn’t justify the swing of the pendulum at the extreme pessimistic end, especially after knowing that there has been no disruption in the growth of the company as per the latest reports of the company (of course, unless you don’t believe in that too).
Bottom line: All else being equal, the probability of a stock going south of a good company by 50-70% within a short period is less (except the bad ones) and the probability of going it further down by 50-70% on a piece of information that turns out to be true (excepting the exceptions) at a later date is even less. As Howard Marks says: Any asset, no matter how low the quality is, can be cheap enough to be a good investment. How low the price should fall to be a good investment is a matter of personal judgement and second level thinking.
Hence, although the actual results of the survey might be different from what one would conclude by himself, it is clear enough going with option ‘a’ would have lead to a better investment results.
The second assumption relates to the time factor. Consider the following improvisation to the above case:
(a) Had the article about the company been based on actual information and the allegations were true right from the start or if the rumors were discarded in the beginning? or
(b) Actual time it took for the uncertainty/rumor to dissipate.
Would the percentage of fall have been quite similar in both the cases to the actual fall. Well, the studies show opposite of that. The answer could have varied by 30-40% on either side.
Again, with the risk of being proved wrong, I believe that the fall wouldn’t have been so steep. The time it took to clear the rumor was enough for people to discuss and gossip among themselves enough that they started believing it to be true. Anyone with not much of expertise could have figured it out. To state that, this is not surprising, is to state the obvious. Some of the best ideas can come from special situations like this provided one has a grasp of the gravity of the situation.
Another aspect of the business model of Vakrangee is that, it is service based company and majority of the service is availed by the lower sections or middle class of the society that have no idea about stock manipulation (unless they happen to watch the business channels) and if they did somehow watched the news still won’t have much idea about what it means. A question that Warren Buffett used years ago when buying into American Express company, can be again repeated here: Does people mind/stop using services of the company after this. Till people are getting the best of services, they don’t care much about any scandal in the company. They are too busy in their life to stop and think about some mischief done a promoter of the company.
Conclusion: The research underscores a sobering message: We’re fascinated with filling information gaps and that obsession can lead us astray. Especially today, when reducing uncertainty has become all too easy. Getting something meaningful out of the information at our disposal is the first step towards investment. In a world where every click brings the promise of a discovery, we are all at risk of becoming information addicts. The challenge lies in differentiating between questions worth exploring and questions best left unasked.
Disclaimer: The author holds shares in the above mentioned company and hence, the opinions expressed might be biased. Do your own homework, before coming to any conclusion. This is not meant to be a solicitation or recommendation of stocks.
P.S: I want to leave with one question as a thought: PNB Bank has been hovering around its 52 Week low for few weeks. Consider the following facts about the bank and then answer the following questions: PNB is the (as on 23 March, 2018):
- 2nd largest bank in India by total assets
- 3rd largest bank by Market Capitalization and Net Sales
- 4th largest bank by Net Profit and Cash and Bank Balance and EPS
Question: (a) How much more lower it can go? & (b) Is the probability of the stock going lower more than that of going higher in the next one year?
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