Lets say you and I play a game. The game is- I offer a genuine Rs 100 note. Depending on my offer, you can either buy or sell.

I: What if I offer it to you for Rs 80?

You: Buy!Buy!Buy!

I: What if I offer it to you for Rs 120?

You: Sell! Sell! Sell!

In each of the above scenarios, the value that will accrue to you is the same — Rs 100. Yet the price at which you were getting it was different- 80 and 120. So anytime, you bought when the price was way below the value and sold when the price was way above the value, you did well. This is a simple strategy and works in the stock market as well.

Take the case of Infosys Limited. Infosys provides IT services to its clients and the nature of its work means that it gets to know the plumbing of the client’s systems really well, better than the client themselves. As a result, it tends to get repeat business. The core business generates huge amounts of cash flows- so much so that the company has been struggling to deploy the excess cash.

Flashback to August 2017. On August 17th, a day before Vishal Sikka resigned, Infosys was trading at 1020 per share. On the 18th, when the news of Sikka’s resignation reached the market, the market panicked and people ran for the exit doors en masse. As a result, the price fell to 873 per share on 22nd August, a 15 % drop in 5 days. On 19th August, just the day after the resignation, the company’s board announced the buyback at Rs 1150 per share.

Now, think of Infosys as the Rs 100 note. Did its value change that much between 17th August and 22nd August because of the CEO’s resignation?

Ok, now consider this. Despite the CEO’s departure, the senior management team was still in place. The core business was still intact; it still continued to make profits, it was still debt free and still cash rich. It still had a high pedigree of founders and board members. And there was an announced buyback at Rs 1150 per share. Yes, there was uncertainty regarding the new CEO, but that uncertainty could easily be resolved. Now, tell me again, did the value of the Rs 100 note called Infosys, change? Maybe, but only by a little.

Fast forward to Jan 2018. A new CEO is brought on board. Uncertainty goes away and suddenly, things look okay again. Within a few weeks of the announcement, the stock touches a high of Rs 1175 per share. Did the value of the company change? Maybe, but only by a little.

So when there was bad news, the market panicked and discounted the value of Infosys by 15% (from 1020 to 873); when there was good news, it again overreacted and offered it at a premium of 15% (from 1020 to 1175). If you bought shares of Infosys on 22nd August, despite the bad news, did nothing with it for 5 months, and sold them on 24th January, you would have made 34% on your initial sum!

So you see, the market is emotional, irrational and chases price. The market watches CNBC, NDTV Profit, Zee Business, reads The Economic Times, The Business Standard and every brokerage report and tries to connect Modi to Trump to N.Korea to China to Russia to Oil to BJP to Karnataka to arrive at the price of a stock. Then it repeats this process to arrive at a new price next minute. And the minute following and so on.

You don’t have to be like the market. You can tune out all the noise and don’t have to have an opinion on everything and instead focus on the value. And value changes slowly, remember? That strategy of chasing value and not price is much simpler and you can get opportunities to make the market pay for its irrationality.

Disclaimer: While I didn’t time the entry and exit as mentioned above, I did try to make some gains of the market’s folly.