Risk of obsolescence

Before the advent of mobile phones, for a brief period, we had pagers as a means of communication. They enabled only one-way communication. All those who had invested in equity shares of companies that made pagers would likely have suffered losses due to obsolescence of technology.

In the above example, technology changed and that made older technology obsolete. In other words, outdated.

There could also be a situation where a particular company does not adapt to newer trends. For example, in the automobile industry, the makers of the Ambassador and Premier Padmini (popularly known as Fiat) cars did not adapt to newer conditions and hence, were complacent. The Ambassador car was manufactured by Hindustan Motors Ltd. If I recall correctly, once upon a time it was a blue-chip scrip and part of the Sensex. Today, I doubt if the company is on any investor’s list of top stocks to watch.

Redefining business ways

There is also the example of watches made by Titan Company Ltd. When they were introduced, HMT watches completely controlled the market. However, Titan redefined ways of doing business. Some time ago, there was a business news item that said HMT Ltd. had stopped manufacturing watches.

An example of a manufacturer of metal tubes also comes to mind. All of us in our 40s and older recall that our toothpastes, medicines, etc., used to be packed in metal tubes until laminated tubes became an alternative. I don’t think there are any toothpastes available in metal tubes today. Companies that were manufacturing those metal tubes got outdated and unless they adapted to newer materials, they are probably out of business.

During the lockdown, cloud kitchens and food delivery companies gained momentum. Similarly, various online aggregators have also gained. Online shopping gave a thrust to digital payments.

They say, “The only constant in life is change”. This applies to products and industries also.

As an investor, it is of immense importance that you keep yourself abreast of developments in the industry of firms in which you have invested via equity. Even if your investment is in bonds/debentures of a company, it is important to keep an eye on that firm and the trends in its industry. For, if the company becomes obsolete for any reason, it would struggle to honour its commitment to bond and debenture holders also. A company that is a winner today need not stay a winner tomorrow.

Anchoring effect

It is important that we do not get attached to our investments. This is cognitive bias. Our mind gets anchored to the original thought process and to decisions taken earlier. We then get emotionally attached to our decisions. This is one of the major biases in behavioural finance. Most times, we get carried away if our investment is in a company/industry that is the market leader or enjoys a very large market share. This is because due to its overall position in the marketplace, it could be generating supernatural growth. It may also get classified as a blue-chip scrip. At this juncture, follow the basic principles of investing. Do not be overexposed to any single scrip or industry. Always diversify across industries and companies.

Emotional attachment

Many of my clients get emotionally attached to their investment. “Gaurav, I would not like to sell shares of [XYZ Ltd]. My father had gifted them to me and they are his blessings. Today, I have immense wealth due to his blessing,” said a client.

As a professional, this is a situation I see fairly frequently. At that point, I use my standard argument, “we are not liquidating the investment, we are simply changing according to the current situation. This will ensure your father’s blessings not only remain with you but keep growing.”

Mutual funds, as investment vehicles, are better equipped to deal with this kind of risk. While a prudent investor in equity may be able to gauge such risk, s/he may not be able to create a well-diversified portfolio due to the lower availability of funds compared with an institution that has access to a significant quantum. Many a time, retail investors also get emotionally attached to one scrip, leading to sudden loss arising out of obsolescence. Emotional attachment, for example, to the Hindustan Motors stock because of the product it made, could have spelt financial trouble for a retail investor.

(The writer is financial planner and author of Yogic Wealth)