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The best way to sell a stock: Tell a tale

by Vivek Kaul/ DNA Money Nostalgia is like a grammar lesson: you find the present tense, but the past perfect! — Owens Lee Pomeroy Sharad Mavlankar is retiring today. He has worked for a stock market broker for the last four decades. He has seen the market change and evolve over the years. When he started working in the mid-60s people had the time to listen to him. Every stock had a story behind it. And it was a part of his job to narrate those stories to investors. The best sales pitch for a stock was to tell the investor a compelling story, backed with some anecdotal evidence. Over the years, things have changed. People still need a story to invest, but now they can get it from other sources like business media, websites etc. His role had diminished, and towards the end of his career, Mavlankar had very little work to do. Aswath Damodaran in his book, Investment Fables, Exposing the Myths of “Can’t Miss” Investment Strategies, points out, “Investment stories have been around for as long we have had financial markets and they show remarkable longevity. The same stories are recycled with each generation of investors and presented as new and different by their proponents.” The present-day experts have simply been recycling stories that Mavlankar had always told his clients. In his initial days, Mavlankar realised that it was easier to sell a stock if he could back it up with a story. As these stories appealed to the basic human nature of fear, greed and hope. And they came in various forms, each trying to target a particular kind of investor. For an investor who is risk-averse, experts recommend stocks with a low price-to-earnings (PE) ratio, stocks which pay high dividends, which trade less than their book value, companies which have stable earnings etc. For the risk-seeking investor, there are growth stocks and loser stocks (stocks which have fallen to an extent that they can fall no more). For those who have taken poor investment decisions in the past, there were stories like stocks always win in the long-term, just follow the experts, etc. There’s some amount of truth in these stories and that’s why they work. As Damodaran points out, “Part of the reason is that each story has kernel of truth in it. For example, the rationale for buying stocks that trade at low multiples of earnings. They are more likely to be cheap, you will be told. This makes sense to investors not only because it is intuitive, but also because it is often backed up by evidence.” Damodaran, in the context of the American stock market, further says, “Over the last seven decades, for instance, a portfolio of stocks with low PE ratios would have outperformed a portfolio of stocks with high PE ratios by almost 7% a year.” But most of these rules do not work all the time. Now let’s take another oft-repeated story, “Stocks always give greater returns in the long-term.” The BSE Sensex touched a high of 4546.58 in 1992. In 2000, it touched a high of 6150.69, giving returns of around 4% per annum in the intermittent period. In between, once it touched a high of 4643.31 in 1994. At the same time, other form of investments would have given better returns than the stock market. The Sensex kept falling from 2001 till 2003 when the present bullrun started. So this story did not work for a period of 12 years — from 1992 to 2003. As Debashis Basu points out in his book Face Value, “By the end of 2002, BSE Sensitive Index, was actually down over eight years of economic growth. Post office savings did better than the 30-elite Indian companies carefully chosen and changed to be part of the Sensex". He further says, “Instead of investing in blue-chip companies like Reliance Industries, Hindalco, ACC, TISCO, Grasim, Telco, L&T, SBI, Glaxo, Gillette (earlier Indian Shaving), P&G, Thomas Cook, Nirma and others you would have been better off putting money in fixed deposits.” The example is hypothetical

Posted by toughiee on Thursday, February 23, 2006 at 5:14 PM | Permalink

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