Investing

Good Company Wrong Price

In the stock market, the only thing you have under your control is your ‘entry price’.

Everything else depends on too many external factors, which are beyond your control.

The only thing you can hope to get right is your entry price, and getting this right can sometimes require a lot of patience and also some luck.

When patience is low, the luck factor increases.

Let us take an example to understand why the ‘entry price’ is important.

Back in 2017, Central Depositary Services Limited (CDSL) came out with its IPO. I liked the company and believed it held tremendous growth potential in the future.

I thought the IPO price was fair. I applied for it but did not get allotment. On the listing day, the company listed at ₹ 250, a huge listing gain of nearly 70% from its IPO price of ₹ 149.

Even though the company appeared to be expensive on the listing day, I decided to buy a few shares. Was I buying a good company at a wrong price?

It did not matter because D-Mart had listed on the stock exchanges a few months ago and was going from strength to strength.

2017 was also that kind of year when even junk stocks were hitting ‘upper circuits’ every day. Why not buy a quality company like CDSL at 40PE when junk was trading at much higher valuations?

The days after listing were good. The price jumped to ₹ 400 within a month and then began the gradual fall.

2 years after the IPO, CDSL was below its listing price of ₹ 250. Clearly, I had bought a good company at a wrong price. It would have been a great trade, but investment-wise it was turning out to be a poor decision.

I bought more shares here. I am against averaging down, but CDSL was one of those stocks I wanted to have in my core portfolio.

The stock continued to consolidate and just when things were about to improve towards the end of 2019, Covid came, and the stock crashed again.

I bought more shares. This time with more conviction because more people were opening Demat accounts. Major discount brokers with CDSL (Zerodha, Upstox etc) were growing at a rapid pace.

CDSL did not move until around the end of May 2020. After that, the stock has been in a steady uptrend, rising from around ₹ 250 to ₹ 750 at the time of writing this article.

Why am I telling you this story?

Well, being patient to get the right entry price is important. For me CDSL has given more than 200% returns, even though I did not get any returns for 3 years after my first investment.

Today, as I write this, social media is filled with charts and recommendations for CDSL. Those who did not care about CDSL at ₹ 200 a year ago, are willing to pay ₹ 700 today.

This isn’t just the case with CDSL, but several other companies which are continuously rising today. Many of these are low quality companies.

The point I am trying to make here is – even a good company at a wrong price can end up hurting your portfolio returns.

If you are a long-term investor or building a core portfolio of quality companies – be patient and wait for the right price. You will ALWAYS get a fair price. Even in a good company, the market always gives opportunities.

Patience and getting the right entry price is not only important for a long-term investor – it’s probably more important for a trader. Intraday, Swing, Futures or Options – it’s important for all. More on this later.

In the next article, I will tell you a story on how I ended up making money from a bad company. And the many lessons that were learn from it.

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