‘Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it’ – Will Rogers
If only it was possible with shares to adhere to the doctrine of ‘if it don’t go up, don’t buy it’ but life – and certainly the world of investments – is never that easy. An experienced investor knows that despite the routines of analysis and appraisal there will be investments that simply do not work out due to the impacts of events or investor fear. And as one of my mentors told me many years ago ‘what happens, happens. It is how you react that really matters’.
These are wise words. So how should you react to a share disappointment?
The first consideration has to be how do you define a disappointment? Quantitatively speaking I would say a 10% share price fall is a first review point but a disappointment does not need to be driven by a share price fall. A disappointment can be an earnings update which does not read to your satisfaction or a corporate acquisition which you think is taking a company in the wrong direction. And it is these latter types of disappointment which guides the real way to respond to a disappointment: ask yourself if today with new money would you buy a particular share again by going through all your regular investment routines again. If you cannot honestly say that you would buy a share with new money today then maybe you should sell.
This is what I try to do with a share that has disappointed in some way. And if the conclusion is to buy more – often at a lower share price – because the essence of the investment story has not changed then you will be doing so from a position more based on knowledge rather than emotion. And emotion can be a powerful influence on both share prices and an individual investor’s behaviour both in causing a share price to fall or forcing an investor to panic at just the wrong moment. The latter emotion of course was one of the starting points for our Fund searching for investment anomalies where fear or greed had impacted erroneously a share price excessively. But we also included some necessary risk controls consistent with the above in our investment methodology.
We have a small number of shares in the Dynamic Opportunities Fund where we have had to undertake such a review and we do so without embarrassment but with an acknowledgement that in the world of investments you always need to keep thinking. And sometimes that means you have to acknowledge that you were wrong and that it is time to sell. And knowing when to sell is often just as important as knowing when to buy.
Looking ahead to the upcoming week there are fewer new corporate earnings to appraise compared to the last few weeks but there is the Spring Statement by the UK government to look forward to. This will include some important big picture observations on the UK economy, Brexit and the budget deficit. We will be looking for insights that help influence our investment selections in the UK and beyond.