We humans are herd animals. For most of our evolutionary history, our ancestors lived in tribes. Becoming separated from the tribe – or worse, being cast out – was a death sentence. "The lone wolf dies, but the pack survives."So, no one want to stay alone, nobody like to think different from the masses and everyone love to get endorsement from someone else. This holds true for the market too, here you can see that one guru will promoter a stock and his followers will rush for the same creating a network effect which will lead to stock appreciating beyond it's true worth, these are herd mentality caused by fear of missing out. We all live in what we call "immediate return environment" because our actions instantly deliver clear and immediate outcomes.Whether our action to rush for a stock makes money or not, is not the question but it fulfils the hunger or desire to own the stock. This is probably one reason why most of the people are addicted to short term trading (instant results) instead of long-term investment.

A reward that is certain right now is typically worth more than one that is merely possible in the future. But occasionally, our bias towards instant gratification causes problems.

•  With our bad habits (expecting quick/fast money, looking for overnight success, doing trading, drinking alcohol etc), the immediate outcome usually feels good (excitement, sometime even profit earned quickly, lottery win etc), but the ultimate outcome feels bad (huge losses, health problems etc).
• With good habits (doing long term investment in quality stocks at reasonable price & expecting slow & steady returns), it is the reverse: the immediate outcome is unenjoyable (boring to invest for long term & do nothing), but the ultimate outcome feels good (wealth creation in long run).

It is almost always happening that when the immediate consequence is favourable, the later consequences are disastrous, and vice versa……Put another way, the cost of your good habits are in the present. The cost of your bad habits is in the future.

We all know that, we should avoid high PE stocks (exuberant valuation) or very low PE stocks (cyclicals or fake earnings-based stocks), but we still buy in order to feed our hunger!

• If you missed buying gold, don't buy coal looking for diamond inside -We all know Infosys of tech boom (at least they exist today) but we forgot the names of companies like Visual Soft, a little-known Hyderabad based company whose stock price went up to 10,000, Global Tele @ 158 PE and DSQ Software @ 100 PE, where investors lost fortunes because these companies don't exist today.
• Don't buy gold at the price of diamond -Investors also lost in blue chip companies like Infosys if they bought the stock at 206 PE in 2000, they did the mistake of buying a stock which had high built-in expectations of investors.
•  Is this not a herd behaviour? - In 2008, it was India bulls Real Estate @ PE of 800 and DLF @ PE of 450 signify a bubble phase. There were 'N' number of real estate companies raised funds thru IPO whose current price are 1/10th of what they quoted during IPO. Poor investor looking for a pie of trend/madness has lost their shirt.
•  Even now in 2018, behaviour has not changed - Coming back to 2018, look at Indiabulls Integrated Services Ltd @ PE > 200 at peak, Indiabulls Ventures Ltd @ PE > 100 at peak and both these companies don't have any underlying business with meaningful earning. Both these companies will become penny stock in future. 
• Buying very low PE is also sin in the market - Other group companies like Indiabulls Real Estate Ltd @ PE of 2 (just think, market is not even believing on the quality of their earnings hence valued at PE of 2) and Indiabulls Housing Finance Ltd @ PE of 8 (this stock is a casualty of HFC/NBFC asset/liabilities issues surfaced recently). Other casualty are DHFL @ PE of 5, LIC Housing @ PE of 10, while quality HFC like Gruh Finance @ PE of 55, PNB Housing @ PE of 18, HDFC @ PE of 33 are better placed then others.

Note: If you are looking forward to build a portfolio of high quality stocks, you can email to mail@3ccapital.com or just fill the form at the website http://3ccapitals.com/wa/ so that we can get in touch with you.

CA.Binoy J. Kattadiyil