|
They say you learn more from losing than succeeding, and while that is probably of little solace to those in the market, there is certainly some truth to it. When we lose, as we all surely must at one point or another, the important thing is that we don't blame the market for being ‘wrong’. It’s also vitally important how you define success.
The market of course is never wrong. Let’s be clear about this; I’m not saying the market is pretty close to accurate most of the time, I’m saying it is 100% perfect all of the time. That doesn’t mean however that the market always ascribes fair and reasonable from an accounting perspective; in fact it often provides valuations that are outright crazy. Still that doesn’t mean it is wrong.
It’s easy to forget that the share market is like any other market; simply a place to meet and exchange. And of course participation is entirely voluntary. All the share price tells you is what two particular people happened to agree on at a specific point in time. It’s their business what price they agree on, and undoubtedly it was acceptable to them given their particular motives and circumstances. While we may have a particular view as to whether the price was fair, it doesn’t change the fact that the price was what it was. Get over yourself; it has nothing to do with you!
If you understand this, then you must also appreciate that if your stocks lose value, it is because others that own the stock are happy to sell at a lower price (and buyers are no longer prepared to pay a higher price). If the market isn’t wrong, does that not then imply that you must have been wrong to buy a stock prior to its descent? Most would say yes, but I think a better answer is, “it depends”.
If indeed you were looking to speculate on short term prices, then yes, you were clearly in error. No if, ands or buts about it. However if your goal was to achieve longer term returns, it is simply too early to pass judgement. Naturally, we can say without any ambiguity that, with the benefit of hindsight, you could have bought in at a better price and therefore increased your total return prospects. No questions about that. But to say that your purchase will ultimately prove to be costly; well we simply cannot say.
Personally I can attest that virtually every share I have bought usually ends up dropping soon after the purchase. That’s just my luck. But that doesn’t mean that most shares I own have lost me money. Quite the contrary in fact, although in some cases it took months and even years for things to come good (from a share price perspective that is, from a dividend perspective all have provided attractive and reliable returns).
Take a recent experience of mine, that of Hastie Group (HST). Although it is leveraged more than you would normally like to see, it seems to tick most boxes. It’s a reliable earner with a good track record and good prospects for growth, yet after they recently warned that earning would probably be the same as last year, the price dropped, and dropped considerably. From $1.55 prior to the AGM to a recent low of 89c today. By the time it got to $1.20 I thought it was representing fantastic value – after all, the PE was 6 and the yield was over 7%. It may indeed have been good value at $1.20, but the fact is it is at even better value now! Ouch.
If I was trading the stock I would have long since exited this position, and probably would have been exited automatically via a stop-loss. But as regular readers know, I am not a trader: I am an investor. I acquired part ownership in this business because I think it will provide good returns over the long term. The market may disagree with me in the meantime, but history has shown that if the company does perform financially, the market will, sooner or later, come to value it accordingly.
Am I attempting to rationalise away a poor trade? Am I foolishly clinging to a belief that has been clearly undermined? These are serious questions and require some honest soul searching. Only time will tell whether or not my purchase will be validated, but in the meantime I need to have the strength of my convictions in order to stay the course. The art is to be able to weigh up all the available information in an objective, rational way and to resist the urge to react on emotion alone.
And as I said at the start, it’s important to clearly understand what you define as success, and then measure things accordingly.
Make the markets work for you
Andrew Page
|