Spotlight: Reasonable Expectations

Unreasonable expectations cause most people to make terrible mistakes when it comes to stock market investing. We share varied thoughts on what makes for reasonable expectations

What do we want out of life? To be healthy, happy with our families, in our work, etc? What interferes with this? Isn’t it often emotions like fear, anger, worry, disappointment, stress, and sadness caused by problems, mistakes, losses, and unreasonable expectations?

Well, that last one – unreasonable expectations – is what causes most people to make terrible mistakes when it comes to stock market investing.

Consider the period of January 2006 when Google announced its financial results for the final quarter of 2005. While the company reported a sales growth of a whopping 97%, its net profit had surged by 82% over the same quarter of previous year.

Now, you would consider this to be a magnificent quarter, right? Well, investors in Google didn’t! As a reaction to these phenomenal figures, Google’s stock tumbled 16% in a matter of second. Trading in the stock had to be interrupted. When it resumed, the stock plunged another 15%. Absolute panic!

Let’s now head to April 2003, when Infosys had announced its fourth quarter and full year results for FY03. I still remember that day, because I was just a week into my new job as a stock market analyst, and was in charge of handling the software sector, and thus Infosys came under my coverage.

The company had just announced its result for the quarter and full-year ended March 2003. For the full-year, it had recorded 39% and 19% growth in sales and net profit respectively. Now you would imagine that these were pretty good growth numbers, right? I did too. But to my horror, the stock crashed by 37% over the next two days.

Imagine losing one-third of your capital in a span of two days. How would you feel? While I was not an investor in Infosys then, but being new to the stock markets, and in charge of research on Infosys, I was utterly confused, and at the same time, scared seeing such a sharp fall in the stock price.
“What’s wrong with the markets?” I asked my senior colleague. “Infosys has reported such a good result, so why has its stock been punished so badly?”

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