Why do stocks go up?

Why do stocks go up? Benjamin Graham, the father of value investing was asked that question. And his answer was: I don’t know.

Many others are less frank. Some say it has to do with earnings, others say it has to do with the market fancy or hype. For most others, it is akin to asking a question like, is there life anywhere else in space – some will say an emphatic “yes”, others will say “no” and many others will shrug their shoulders and say, “who knows?”

On Jan 31st of this year, I looked at a stock called ‘Standard Industries’, which looked cheap. It was then priced at Rs 24 with a market cap of Rs 154cr. Its main line of business used to be chemicals and textiles at one point in time (it is a 104 year old company). However it lost its way on the main business. But here is the twist: fortunately it had 93 acres of land in navi mumbai. They asked a Singapore company to develop 30 acres and recieved around 230 cr. for the same last year.

Why it looked cheap was as follows: While the company was valued at Rs 154cr., it had Rs 139cr. of hard cash sitting on its balance sheet. And it had 63 acres of land left from the original 93 acres.

So if one was to extrapolate the value of the 63 acres of land on the basis of what they had received for the 30 acres, it meant that it had land worth at least Rs 460 cr. With the hard cash of Rs 139 cr., the company should have been valued at almost Rs 600 cr. Against this, the current market cap was of Rs 154cr. More or less at a quarter of its value.

Being on a day job and working out of Singapore, I requested a friend, a professional and a past master in this field, to find out why the market was treating the company so shabbily. He found out through a colleague that there was indeed no reason for the market to not recognize the value. But there was a problem. The volume was very low and so buying a meaningful quantity was difficult.

Meanwhile, within a month and a half of this dialogue, here is what happened to the stock price:



And ofcourse the volumes went up too.

Hence, to ask the earlier question in a more pointed way, what has changed between February of this year and now, when the price is pushing Rs 52 a share (117% increase)?

Well nothing as far as the company is concerned. There are no announcements from the company, no news announcement far as I can tell. Note that it has still not reached anywhere close to its true value, but once the market decided that it is undervalued, it was being bought like it had just been launched.

And the answer is??

Well I am in the category of the ‘shrug-your-shoulders-and-say-who-knows?’ But I can quote something else from Ben Graham, which has remained with me ever since I read it:

If you have formed a conclusion from the facts and if you know your judgement is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Day-to-day price changes can be inexplicable. And that's a really good reason for not watching one’s portfolio too closely. Concentrating on the company's intrinsic value and acting on it is far healthier than worrying about why stocks go up.