When investors drop on average, they are either taking a contrarian approach or hoping to replicate the stock’s past performance in the future.
For example, suppose a stock was worth Rs 150 in the past and you entered the stock at Rs 100. And now, it has decreased to Rs 80. In this case, many investors, especially retail, tend to hope that the price will rise by returning to its previous highs, without studying why the stock almost halved. So they double their position, euphoric that their average cost has gone down but the truth is that they now have a higher allocation to trade, which is more likely to be a loser.
This is primarily because investors fail to understand that violating the trend can also mean that you are ignoring the risks that cause others to sell. Also, the low average is subject to behavioral biases such as the sunk cost and loss avoidance fallacy. The first is the phenomena in which a person is reluctant to leave the strategy because they have invested too much in it, although abandoning it would be more profitable, while the second is the phenomenon in which investors are afraid to accept losses.
Moreover, the fact that stocks that have collapsed due to lackluster fundamentals or due to corporate mismanagement, such as DHFL,
Telecom, Suzlon, etc. tend to have the highest retail holdings, further proving this point. This is because savvy investors generally get out of such situations after seeing signs of stress in the company, rather than cutting their average investment.
So, the basic idea is that lowering the average only makes sense if you’re satisfied that the company’s fundamentals haven’t deteriorated and that the future prospects are also attractive. Else, you’ll end up listing the popular phrase “medium losers,” coined by famous hedge fund manager Paul Tudor Jones.
event of the week
The market has been discussing and searching for the LIC for months and now the much-anticipated IPO is set to hit the streets. In an attempt to entice investors, ensure sufficient liquidity, as well as initiate the achievement of divestment goals, the government decided to sell only a 3.5% stake in LIC. Even after issuance volumes declined, LIC remains the largest IPO in India’s history and is expected to test investors’ appetite next week amid bumpy markets globally.
Surprisingly, the IPO is only rated at 1.12 times the implied valuation, far lower than what market participants had been expecting. Given the very reasonable assessment of the insurance giant, an upward re-rating of special players is not off the table yet.
Nifty 50 closed negative and continued to consolidate in the 16900-17350 range. The support area was created around 16800 as a very crucial level as there were multiple retracements from these levels.
Nifty last week formed a doji candle and this week the indicator formed an inverted hammer pattern around the support area. This indicates a slight bottom is in place and a breakout to the upside is expected.
We suggest traders maintain a bullish position on Nifty for two weeks, targeting a retest of 18,000 levels. Strict stop loss should be maintained below the immediate support of 16,850.
The global headline will be the Federal Open Market Committee meeting, which is largely expected to rise by 50 basis points. If the Fed’s actions are more hawkish than expected, quick reactions may emerge. Also, the unemployment rate will be closely tracked.
Back home, the monthly auto sales numbers are bound to pique the interest of investors trying to predict future trends in auto stocks. Also, as India’s largest IPO, LIC, is about to take off, there could be some impact on secondary markets given that liquidity will be directed towards the IPO.
Given these events and the current earnings season, the volatility that occurred this week is expected to continue into the next day as well.
Nifty 50 closed the week at 17102.55, down 0.40%.