Wednesday, August 15, 2018

The futility of knowledge....

'All the knowledge and wisdom that one accumulates is futile if one do not act on that knowledge'

Take it from me, I should know.

Readers of this blog know that I am running a blog series on reading and reviewing 50 Books in Finance, currently I am in Book Number 37, Think Like a Billionaire, become a Billionaire

The incident that I am about to narrate happened in the end of 2015. I was in the middle of reading and reviewing the book 'New Buffetology'. This amazing book gave countless examples of stocks trading at significant discount to intrinsic value. The basic premise was than a value investor should buy great businesses trading at low valuation.

Such stocks are not generally available.
However, markets provide such opportunities and a savvy investor should latch on to such opportunities. One such opportunity is provided when the company gets into a controversy that drives down the share prices. If the investor thought that the company had the wherewithal to overcome the controversy, she should take advantage of the temporary price drop and make significant investment in the shares of the company. Sooner or later market will revert to the long term average prices for such companies. 

As I was reading the book, the events relating to Nestle India was unfolding. For those who have forgotten, sometime in June of 2015, UPFDA accused Maggi noodles, a flagship product of Nestle India, of having high levels of Monosodium Glutamate (MSG) and high levels of Lead. The share prices of Nestle India fell from over 7000 to almost 4800 as a result. 

Only decision I had to make was whether this was a temporary phenomenon. I was convinced that this was a politically motivated controversy since a competitor close to the ruling party was bringing their on Noodles into the market. This controversy was too convenient for that competitor to capture market share in the highly competitive 'Two Minute Noodles' market in the country. 

Maggi Noodles has a very strong brand presence in the country. It is consumed by almost all of the younger generation and that demand was not going to go down. I was convinced that this was a temporary phenomenon and that Nestle shares were bound to bounce back from the lows. I knew that such low prices were not going to sustain and such opportunity was not going to appear any time soon.

You see, I knew everything that I needed to know. Only thing is that I needed to sell some of my shares and invest in the shares of Nestle India. 

But I dilly dallied, I hesitated, I waited for share prices to fall still further. Remember I had seen a price of 4800. I was fearful that I will buy the shares and the prices will fall further.

I lost focus for a few days. Next time I saw, the price was 5800.

It was still cheap. But here I made a second mistake. I pegged the price to 4800. I waited the share prices to fall back to that range.

Then the price went up to 6000, 6500 and was back to the pre-controversy level of 7000. This was no longer a value buy opportunity. 

The Maggi 'non controversy' faded from the headlines. The share prices continued its upward climb.

Today the share price is almost 11000. 

I missed a long term investment opportunity. I had enough and more of knowledge...

But I did not take action based on that knowledge.

What use that knowledge?

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