Case Study : The BBC Principle

3 min read

Looking back a few years, the idea of investing in a stock like NTPC might have seemed unappealing. With its stagnant performance and modest dividends, it didn’t attract much attention. However, this reluctance to invest often stems from recency bias, where recent trends heavily influence our decisions. But if we delve deeper into the stock’s history, we uncover a more nuanced narrative.

A Decade of Stagnation

The trajectory of NTPC’s stock reveals interesting patterns. Following a significant surge from around Rs34 to Rs120 during 2005-2008, the stock entered a prolonged period of stagnation. Despite occasional fluctuations, it remained within the range of Rs70 to Rs110 for over a decade. Such prolonged sideways movement can deter investors, creating a narrative of skepticism around the stock’s potential for growth.

The Cycle of Consolidation

Stocks that remain dormant for extended periods are essentially undergoing a process of consolidation. While their earnings may continue to grow, stagnant prices lead to a derating from a price-earnings ratio perspective. Over time, these stocks become increasingly undervalued, setting the stage for a potential repricing triggered by industry shifts or renewed investor interest.

Breaking Free from Bias

The key to unlocking the potential of such stocks lies in breaking free from biases rooted in past performance. While narratives of underperformance may dominate, opportunities for significant gains can emerge unexpectedly. For instance, NTPC’s resurgence during the COVID era, with its stock soaring from Rs62 to nearly Rs340, demonstrates the potential for multifold growth even in seemingly stagnant stocks.

Crafting a Winning Strategy

To capitalize on such opportunities, investors need a robust framework for stock selection and management. This includes defining criteria for identifying potential winners, determining entry and exit points, and allocating resources strategically. By adhering to these principles and allowing price action to guide decision-making, investors can navigate market uncertainties more effectively.

Embracing the BBC Principle

At the heart of successful investing lies the BBC principle: Bhav Bhagwan Che, or letting price movements dictate actions. By embracing this principle and remaining open to the signals conveyed by stock prices, investors can position themselves to seize opportunities and optimize returns. Rather than succumbing to emotional biases or predetermined narratives, they can adapt dynamically to changing market conditions.

Spotlight : The art of dealing with (no) emotions !

Navigating the decision to invest in a stock that has remained range-bound for over a decade poses a significant challenge, particularly for those engaged in discretionary styles of investing. 

We take the example of COAL INDIA which finally broke out of its long-standing range towards the end of 2023 and try to draw some learnings from two scenarios.

Existing investors, having weathered the stock’s historical cycles, may view the breakout as an opportunity to sell, anticipating a return to familiar correction levels around Rs 200. Conversely, newer investors might hesitate to enter the market at Rs 200, fearing a repetition of the 2015 correction pattern.

Momentum investing offers a refreshing departure from such biases, empowering a predefined system to dictate stock entry and exit points. The Mi India Top 10, for instance, picked up this stock around Rs 295 in October 2023 and has been a beneficiary of  its impressive performance ever since.

Of course, we cannot exactly say how long this trend may last. But we are quite sure about the fact that the strategy will be quick to get rid of any stock that starts to observe a fade in its momentum. 

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    Case Study : The BBC Principle