Investment follies

Often in stock markets, proponents of value investing tend to choose a stock with a proven track record and a consumer monopoly seemingly impossible to beat. What Warren Buffet achieved with Coca Cola or Gillette, every value investor wannabe wants to emulate. 

Value investors, to put it simply, try to identify strong companies with a strong consumer acceptance. Their products are fairly cheap to produce, requiring less capital expenditure, wide or growing acceptance, enjoy deep customer acceptance and trust. Such high levels of consumer trust or other factors, serve as a deep advantage, a kind of protective moat around medieval castles, for the company which competitors find difficult to match or break.

But the road to prosperity has many a learning curves. Take the example of Nokia Corporation. Nokia was the ubiquitous choice of everybody till a few years ago. The handsets were sturdy, reliable and with decent performance.  

Chart 1: 2005-2007 (roughly)

Chart Source: Google Finance

The stock must have been the darling of the investors in those days. And rightly so, for the stock gave a sweet 147% from early 2005 till end 2007 giving a CAGR of 35% over 3 years. Nokia was one of the most popular phone brands for some time, a long time by technology standards.

It would have been easy for someone with the value investment tenets in mind to attempt to latch on to something that looked like becoming another consumer monopoly. A product (mobile phones, in this case) which was growing in popularity and usage and hence the market leader in the segment should have been logically most likely to gain out of it.

Chart 2: 2008-2012 (roughly)

However, as investors often learn from hindsight, the rise in the stock was to be followed by an unprecedented and steep fall which would have allowed only a lucky few to exit the stock in time to cut losses.

Just have a look at the same stock after an year. Eeeeks!!!!

Chart Source: Google Finance

The price of the stock of Nokia in NYSE was $38 in the beginning 2008, it now trades at a mere $4.8!!! A whopping 87% EROSION in wealth or 40% erosion CAGR de-growth.

Reams have been written about what all went wrong with the company. Significant amount of literature on the net will point to new smarter and more nimble competitors coming up like Android and iPhone. Most of the utterings of the Nokia management attributes to roughly similar reasons for the steep fall.

Whatever the company may say, this fall cannot be solely because the company failed to secure a seat on the smart-phone bandwagon. Was there a quality and service issue that the consumers know and the management wishes to hide?

I give this example not as an example of a doomed company. Who knows, the company may rise like a Phoenix from the ashes. To their credit, Nokia is still fighting the battle and the Finnish company is still not “Finished”. They still have legions of consumers worldwide, yours truly being one of them. 

I cited Nokia as an example, simply because I just wanted to draw attention as to how in time, seemingly strong players with deep moats get being beaten down by market forces. Some of them survive, some don't. 

Recently my friends were discussing a popular automobile maker, which (according to us) was showing early signs of competition catching up and beating the daylights out of it . I must admit, only a short while back a lot of us, including me, were positive on the stock and believed it was also having a deep competitive advantage over any newcomer. 

Sounds similar to the Nokia case, doesn't it? 

Disclaimer

I have used publicly available information on price movements. They can be verified from the links given. I don’t take responsibility for their accuracy or otherwise. I have no intention to indicate in any way that any company named or unnamed here or its employees (present or former) are directly or indirectly responsible for share price movement of the company. 

I am not an expert on Nokia Corporation’s performance nor claim to be. I haven’t officially covered or studied it. I don’t claim to indicate in any way  Nokia Corporation’s future price performance or product & service quality in past, present or future, except for my personal experiences. This article should only be treated as an illustration on the personal views of the author which may or may not be correct. This is just an illustration of some of the mistakes that I have committed and learned from over time. This is no invitation or claim for any future performance of any company, stock price, product or people. I also don’t claim to be an expert on Value investing nor do I endorse that method to be superior or inferior to any other method practiced in the capital markets. Any errors of omission or commission are regretted.