How to be Greedy When Others are Fearful

This morning, the Jakarta Composite Index (JCI) tumbled 2.0% to 4,033 only minutes after the opening. Shortly after, I receive Whatsapp from one of alumni of my value investing class, asked about one of the stocks that I recommend (and not only I recommended it, I buy it as well), let us call it ‘A stock’. He asked, Dear Sir, is A stock still in your pick list? Because I saw its price fall down this morning.

Then I said, ‘I’ve just heard that the company would go bankrupt..’ And as I expected, with a tone of panic he asked again, ‘Gee.. Are you serious???’

After I say, ‘Just kidding :D The company is completely safe! Its shares fell only because of impact of the decline of JCI, not because of fundamental issues’, so then he said, ‘Oh thank God.. Sir, you almost got me a heart attack!’

Well, if I said to this alumni that ‘The Company A will go bankrupt’ in last April, when the index is still in position of 5,400’s and when the shares of A also still in a high position, then what do you think he would react? He might be panic as well, but would not be as panic as if I say that Company A will go bankrupt in a condition which its stock price already tumbled as today. In fact, if I say that 'The Company A will go bankrupt' in April, then people would probably see it as nonsense. But if the sentence was said at this point, then even though it is only an empty rumor, but an investor who previously very confident that Company A is a very good company without any serious problem, he would start to be hesitate and began to think that the bad rumor may be true.

So, got the point?

Whenever I held a class of value investing, I always emphasize that the main difficulty in investing using the method of ‘to buy high-quality stocks at lowest possible prices’, is not about how to determine the fundamental quality of a stock/company, or how to calculate the valuation and determine whether a stock can be said to be undervalue or not. Because in practice, the calculation of such analysis are often using a simple math only.

The hardest part of the game is, when you find a good stock at a price that is unbelievably undervalued, usually at the same time the JCI was dropped, the economy worsened or even in crisis, and pessimism were scattered everywhere. Inevitably, your psychological condition will surely affected, even if you are experienced as an investor for decades.

And as a result, you will not be that easy to immediately buy the ‘hidden pearl’ you just discovered. No matter how detail the analysis you’ve just made, no matter how strong your belief that your stock will produce sizable gains in the future, but you will feel hesitant when the price of your target stock has gone down much lower than the purchase price you are targeting before. Warren Buffett always said, 'Be greedy when others are fearful', but in practice it does not that easy because.. hey! As investors, we're part of the market as well! So if the market is in a panic state, then how could be we become greedy ourselves?

Buuuuut, if you able to resist the flow of the market, to beat your own hesitation, then holaaaa.. after one or two years, the fruit will be very sweet! At the beginning of 2014, or just after the JCI fell down in the previous year (dropped from 5,250 to 4,200’s), I said that although 2013 had been a painful year, but the year of 2014 will be a big opportunity for those who are able to focus on the facts that the valuation of shares on the Indonesia Stock Exchange at the time (the beginning of 2014) was far lower than the valuation at the beginning of 2013. You can read the article in here.

The position of JCI at the end of 2014

And voila! JCI rose 22.3% during 2014, bringing outstanding profits for almost everyone. Surprisingly, in the last few days the JCI return to the same position like at the beginning of 2014, or even lower. So, what do you think? Just remember: In a very short term (three months or less), JCI may rise or fall depending on sentiment in the market. So even if you assume that today’s stocks are very undervalued, but that does not mean that the JCI can not go down further. But in the long term, ie one year or more, with an assumption that the Indonesian Economy will be improved in early 2016 (we will discuss this matter later), the JCI will certainly fly high again. We’ll see.

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com.