Never let your biases decide your strategy - The PFC case study

Let your Winners Run & Cut your Losers Short

Investing in the stock market is often perceived as a game of chance, where investors aim to predict the ups and downs of stock prices in order to make profitable trades. However, sometimes the best strategy is not to rely solely on past patterns and trends but to be an active watcher of what is happening in the market. This is especially true when it comes to a stock like PFC Power Finance Corporation.

For the past 16 years, PFC’s stock has been range-bound, fluctuating between Rs100 and Rs30. This stagnant performance might discourage some investors from considering PFC as a viable investment option. After all, who wants to tie up their funds in a stock that hasn’t shown significant capital gains for over a decade? However, what many investors fail to realise is that history does not always repeat itself.

In 2023, something unexpected happened to PFC’s stock. It broke out of its long-standing range and started a rocket-like move from Rs100 to Rs250.

This rally took many investors by surprise, proving that past patterns and trends are not always relevant in the ever-changing world of finance. So what can we learn from this remarkable turnaround?

Do not let bias get in the way of your thesis

If your bias was to buy whenever the stock hits the channel low and sell whenever it hits the channel high, you would have missed out on the significant gains that PFC’s stock experienced during this breakout. It’s important to remember that sometimes stocks can change forever, and relying solely on past patterns might cause us to miss out on great opportunities.

One might argue that being an active watcher of the market and taking advantage of short-term momentum could have been a more profitable strategy. However, even for momentum investors who entered and exited PFC’s stock during various rallies, the opportunity cost of tying up capital for 15 years would not have been a deterrent. By investing elsewhere during the years when PFC’s stock was range-bound, these investors were able to diversify their portfolios and potentially earn profits from other investments.

Now that the breakout has occurred, momentum investors who entered the market between Rs100 and Rs120 have already seen their investments double. Even if the stock were to experience some significant falls from its current high, these investors would still be able to exit the market with a profit near Rs200. This highlights the importance of considering opportunity cost in your investment calculations.

Sticking to your strategy is crucial for success in the stock market. It’s essential to let your winners run and allow your investments to reach their full potential. Cutting your losses short is also important, as holding onto underperforming stocks can tie up your capital and prevent it from being invested in more promising opportunities.

Power Finance Corporation’s breakout serves as a reminder that the world of finance is constantly evolving. Past performance is not always an accurate predictor of future results, and investors must adapt their strategies accordingly. By being vigilant and actively observing market trends, investors can capitalise on unexpected opportunities and achieve greater financial success.

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