Stock investing and the boiling frog syndrome

If you are interested in psychology or behavioural economics, you’d surely have come across the boiling frog syndrome. The theory goes that if you try to dunk a frog in a pot of boiling water, it will immediately jump out. But if you place it in cool water and slowly heat up the pot, the frog will ignore the small changes in temperature and simply boil to death. 

Thankfully, sceptical scientists testing out this theory have found that the smart frogs of today do not stick to this script. They do escape when the water gets too hot to handle. But the boiling frog syndrome does apply to human behaviour in many facets. For instance, climate activists argue that we humans are steadfastly ignoring hotter summer temperatures, colder winters and more frequent extreme weather events, because we would not like to recognise the existence of climate change. 

Can the boiling frog syndrome apply to equity investing? After taking stock of the investment mistakes that I’ve made in my portfolio, I think that the boiling frog syndrome applies to portfolio decisions too!  

Stock investing and the boiling frog syndrome

If you are a fundamental investor, you buy a stock based on the positive triggers that you see to the company’s growth, earnings or valuations in future. But sometimes, you become so attached to the stock you bought that even if none of the positives you expected are coming good, you hold on. You keep hoping against hope that the stock will somehow deliver, despite the changed circumstances. Even seasoned investors and analysts are not immune to this syndrome.

BPCL’s strategic sale saga

A classic example of this is the stock of Bharat Petroleum Corporation Limited (BPCL), the public sector Maharatna engaged in oil refining and marketing. 

BPCL began to feature in the coverage lists of leading brokerages in November 2019, when the Indian government announced that it was going to divest its entire stake of 52.9% in BPCL to a strategic buyer in a bid to privatise the company. Past strategic divestments by the government, such as the sale of Hindustan Zinc and Balco to the Vedanta group and CMC to TCS have delivered enormous wealth to shareholders, so markets were quite enthused by the move and pushed up the stock to Rs 524 levels in October 2019 (which in hindsight proved to be its five-year peak). This event also swept the stock into the coverage lists of many analysts. But this trigger to re-rating has till date remained only on paper. 

The saga goes like this. In March 2020, just after the government invited Expressions of Interest from private bidders for BPCL, Covid’s first wave hit and the tender received a very tepid response. With Covid-related uncertainties hovering over the demand and pricing outlook for oil, the offer had to be extended multiple times. Meanwhile, contractual terms forbade BPCL from being sold to a private bidder while it still held a stake in Numaligarh Refinery. 

After long parleys, during which hopes were fuelled by BPCL fetching a good price for this refinery, BPCL divested its stake in Numaligarh Refinery to a set of PSUs and the Government of Assam at a modest price of 8-10 times earnings in March 2021. But if investors were hoping that this sale would push things along on the divestment front, it didn’t. 

As crude oil prices began to climb and oil marketing companies like BPCL were ‘persuaded’ not to hike selling prices, prospective investors began to question the government on its indirect price controls over oil marketing companies and seek assurances that it would refrain from interference. This was perhaps not forthcoming. So, after extending the EOI date multiple times, the government finally decided to call off the BPCL stake sale in April 2022

Meanwhile, BPCL’s fundamentals took a distinct turn for the worse. With crude oil prices rising and oil marketers not allowed to peg up their selling prices in line, BPCL has slipped from sizable profits into losses of over Rs 6,000 crore in the recent April-June 2022 quarter. All this has led to the stock being a consistent wealth destroyer in the last three years, falling from the peak of over Rs 520 hit just after the strategic sale news, to Rs 331 now. Thanks to losses, its PE too has moved up sharply from 15-16 times in November 2019 to over 25 times now.

Living in denial

But bullish analysts have refused to give up on the stock, incessantly issuing ‘buy’ calls after every negative event, citing triggers such as a likely fall in global oil prices, gains from future privatisation, a foray into city gas distribution and even BPCL’s mission of being a net-zero emitter, to justify their buys on the stock. Here’s what different brokerages said about BPCL over the last 18 months, amid the steady trickle of negative news.    

After the strategic sale didn’t find takers for a year

February 2021 Prabhudas Lilladher: Buy at Rs 422, Target Rs 505 

“We change our FY23E earnings estimates by 32% to incorporate inventory gains of Rs37.8bn in 9MFY21. FY22/23 earnings are changed by 6%/4%. During Q3FY21, core standalone EBIDTA adjusted for inventory gains and forex gains was at Rs34.6bn (+178%QoQ) due to higher marketing earnings. We believe uncertain global demand and high inventory levels will likely keep crude oil prices range bound to support marketing margins in medium term. Meanwhile GRMs will recover with pickup in economic activity and lower operating cost (due to soft spot LNG prices) will support refining earnings. BPCL remains one of our preferred divestment plays in the oil and gas sector.”

After sale of Numaligarh to other PSUs

May 2021 Motilal Oswal: Buy at Rs 468, Target Rs 570

“The company made huge progress towards privatisation in FY21, despite challenges posed by Covid-19, by streamlining its subsidiaries (divested its entire stake in Numaligarh Refinery Ltd., consolidated its stake in Bharat Oman Refineries Ltd., merged Bharat Gas Resources Ltd. with Bharat Petroleum) and sold off its trust shares.”

After government pressure on pricing hurt margins 

March 2022 HDFC Securities: Buy at Rs 364, Target Rs 420

“We are positive on Bharat Petroleum Corporation Ltd., given it has corrected ~30% from its peak over the last six months, owing to pressure on auto-fuel marketing margins and an increase in liquified natural gas under-recoveries. We believe the recent correction is overdone, and see BPCL's limited downside from current levels, led by improvements in refining margins, resumption of daily auto-fuel price changes, and a gradual reduction in LPG under-recoveries.”

After strategic sale is officially called off

June 2022 Nirmal Bang Securities: Buy at Rs 314, Target Rs 393 

“BPCL management aims to achieve net zero emission goal, including green hydrogen target of 10GW by CY40. Initial plans include Rs50bn investment to set up 1GW of green hydrogen capacity using electrolysis at its Bina refinery site (erstwhile BORL). The company is also investing Rs275bn in the city gas business across 25 GAs. BPCL’s future plans straddle both green as well as traditional fuels. This envisages investment in EV charging facilities and conventional fossil fuels, based on the positive growth outlook in India/Asia over the next 10-15 years even as it pursues green energy projects and its net zero target.
We maintain Buy on BPCL based on fundamentals of refining (which offer potential upside to street estimates), stable retail earnings (assuming eventual decline in oil prices from current unsustainable highs), additional margin from the new petchem project at Kochi and long-term cash flow potential from its CGD projects.”
After slipping from profits into losses

August 2022 Nirmal Bang Securities: Buy at Rs 334 Target Rs 391“BPCL reported standalone loss of Rs62.91bn for 1QFY23, which was higher than NBIE/street estimate of a loss of Rs28.9bn/Rs46.4bn, the higher loss was due to the higher-than-expected loss in the Marketing segment and higher forex loss. We maintain Buy on BPCL post our revised estimates and 0.4% decrease in the target price on an unchanged PE of 6X. We have cut FY23E by 42.8% and FY24E a tad.”

Regulatory change

In the BPCL case, investors have been subject to the boiling frog syndrome on developments within the company. But this syndrome is more common when the risks to a company’s prospects arise from external risks such as regulations. The Indian fertiliser industry is a classic example of this. 

In the last couple of years, stocks of India’s leading fertiliser makers such as Coromandel Fertilisers, Chambal Fertilisers, RCF and so on, have been on investor’s radar because of favourable factors such as good monsoons, rising global food prices and a global rise in fertiliser prices owing to the Russia-Ukraine war. Investors buying into the sector have been willing to ignore the fact that every aspect of operations for a domestic fertiliser maker is heavily controlled. Domestic fertiliser companies whether they make urea, DAP or complex fertilisers are required by the government to sell their products far below costs, with the difference between their actual cost and controlled selling price reimbursed as subsidy by the government. 

For long, players such as Coromandel or Chambal have managed to survive and expand profits in this highly regulated industry through extension activities, brand building, distribution strengths and the ability to come up with unique NPK combinations that farmers take to. With effect from this October however, the government has put an end to such product differentiation by bringing in new draconian rules for the industry. 

The new rules require all companies to do away with all branding and marketing activities and sell their different products under a single “Bharat” brand and sell fertilisers only in their immediate vicinity to save on freight costs. The Indian government is also making a push for running government-owned retail outlets for fertilisers and for replacing traditional fertilisers with “nano” versions, after testing out nano urea. These developments pose an existential threat to private players who have made legacy investments in brand and marketing of fertilisers. They will now have to find alternative means of rescuing their profitability in other agri inputs. (If you are a Growth subscriber you can read more about this here). But both the broking community and individual investors have been unwilling to rethink their bets on fertiliser stocks.

What you can do

The above instances show that the boiling frog syndrome does affect you as an equity investor. If your stock portfolio has a long tail of companies that no longer excite you and act as a drag on the performance, you are likely a victim of this syndrome. You may have bought into companies or sectors convinced of their brilliant prospects, but haven’t exited those bets when subsequent events took away those positive triggers to earnings or growth. 

Recognising the ‘boiling frog’ stocks in your portfolio at an early date can help you free up cash by selling such stocks and adding to exposures in companies with much better prospects.

Guarding against them

Here are three ways to ensure that boiling frogs don’t do damage to your long-term portfolio.

  • Write down your investment thesis: We humans are hard-wired not to admit to mistakes. That’s why we saw those analysts, in the BPCL case, inventing new and creative reasons to rate the stock a buy even after the initial thesis had completely failed. With a personal portfolio, admitting to mistakes is much easier (you don’t have to make a public declaration of it!). So do maintain a journal of the 4-5 reasons why you are buying a stock, when you take on any new position. Later, if you find that the triggers you expected are not materialising or are vanishing, you’ll find it easy to sell the stock. 
  • Monitor your stocks and sectors closely: If you’re a direct equity investor, there’s no escape from keeping close track of the company’s corporate actions, exchange filings, quarterly results, investor calls et al to see if the earnings are on track. In addition, you need to track the external environment for the sector and regulatory changes to identify if the investment case is becoming weaker. 
  • Set a stop-loss: Fundamental investors can learn a lot about not being dogmatic from short-term stock traders. Most serious traders do not take large positions in a stock or index without a pre-set stop-loss. The stop-loss which is usually fixed 5% or 10% below the trader’s buy price, ensures that the trader does not lose too much capital and cuts losses quickly if his bets go wrong. Fundamental investors need not exit at a 5% or 10% dip in the stock price below one’s buy levels. But if you set alerts for the stocks you own falling, say, 20%, 25% or 30% below your buy prices, such alerts will force you to re-examine your investment thesis. If a stock has fallen 20-30% below your buy price, it’s a clear indication that either you timed your entry wrong (in which case you may decide to hold on or average) or that your thesis was wrong or that subsequent events have changed the investment case for the stock (which may call for a sell).

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8 thoughts on “Stock investing and the boiling frog syndrome”

  1. Very Good Article Aarti n Team

    I also suffered fm it in past but biases were so strong that I failed to admit… Kept on making Theories to justify my position. At the end, I left direct Investing and moved to Equity MF though my success ratio was close to 65% in right stock picking.

    Slowly slowly, now I hv started gaining know how on these biases.

    Regards
    Keyur

  2. Dear Ma’am
    i contemplate to adopt momentum investing.
    But to decide when to exit if i consider variation in stock price in a one year period as a parameter, it looks very long a period due to high stock price variation in short time spans.
    What do you advice?
    should it be six months or a quarter?

    regards
    niroja

  3. Also wondering is it good to switch from bpcl to a stock from similar line of industry which is featured in prime stocks in earnings compounding category , hope you get which one am referring too 🙂

  4. Have BPCL in portfolio, of course it’s in negative. Was wondering what to do😐, timely article. Just waiting for a rally to just exit it..

Comments are closed.

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Refunds: There can be no cancellation and refund of subscription fee paid once the subscription is active, other than as stated in Clause 8 of these Terms. If the client is entitled to a refund as specified under Clause 8 of these Terms, the RA will credit that refund to the card or other payment method used by the client to submit payment, unless it has expired - in which case the RA will contact the client to proceed with the refund. If we do issue a refund or credit due to circumstances outside the obligations specified under Clause 8, we are under no obligation to issue the same or a similar refund in the future.

General disclaimers: The recommendations made herein in the Research Services are expression of views and/or opinions and should not be deemed or construed to be advice for the purpose of purchase or sale of any security, nor a solicitation or offering on any investment/ trading opportunity on behalf of the company, AMC, insurance company, or issuer of security referred to herein.

The content and research reports generated by the RA does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities.

The information/ opinion/ views mentioned in research reports or by the RA are not meant to serve as a professional guide to the client or recipients of this Report. The research report, recommendation, or any other content published by the RA do not assure or guarantee any minimum or fixed returns to the client or recipients of the reports/ recommendations/ content.

Use of this information is at the client’s own risk. The client must make his/ her own investment decisions based on his/her specific investment objective and financial position and using such independent advisors as he/she believes necessary. The services rendered by the RA are on a best-effort basis. All information in the content or research report of the RA is provided on an as is basis. Information is believed to be reliable but the RA does not warrant its completeness or accuracy and expressly disclaim all warranties and conditions of any kind, whether express or implied.

While due care has been taken to ensure that the disclosures, information, and opinions given are fair and reasonable, PrimeInvestor Financial Research Pvt Ltd and/or none of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/ opinions/ views contained in the research report and recommendations that form part of the Research Service, and/or mails, social media or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Returns and performance figures mentioned in the research report represent past performance and should not be constituted to be future returns or guaranteed returns.

Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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