Tell me if this scenario sounds familiar: Your shares are losing money. You want to sell, but deep in your heart, you think: ?The paper loss is not realised until I sell it, maybe it will bounce back and I will sell when that happens!?. In a perfect world, everyone aims to profit from buying low and selling high. Unfortunately, the reality has proven that buying low can still get much lower, especially when the company is not doing well.
The Oil Price Plunge
The past few months has not been kind to oil and gas companies. Since the start of…
Tell me if this scenario sounds familiar: Your shares are losing money. You want to sell, but deep in your heart, you think: “The paper loss is not realised until I sell it, maybe it will bounce back and I will sell when that happens!”. In a perfect world, everyone aims to profit from buying low and selling high. Unfortunately, the reality has proven that buying low can still get much lower, especially when the company is not doing well.
The Oil Price Plunge
The past few months has not been kind to oil and gas companies. Since the start of the year, shares of blue chip companies such as rig builder Keppel Corporation Limited (SGX: BN4) has fallen 29%, while smaller oil and gas companies like Ezion (SGX: 5ME) has seen a bigger drop in the tune of 45%. The SDPR STI ETF (SGX: ES3) – a proxy for the market barometer the Straits Times Index (SGX: ^STI) – has been wobbly as well, drifting down close to 5% from its 52-week high. As such, it might not be surprising to find some of our own shareholdings in the red for the year.
The red lights you see is not Christmas
The vast majority of investors tend to only focus on the upside when they invest in a company. They tell themselves that “I will earn big bucks on this stock” but ignore the downside that it may bring. The sad truth is that no stock investment is fool-proof and stock market fluctuations can drag down your share prices beyond your wildest expectation. Or as investing maestro Peter Lynch would put it:
“Sometimes it’s always darkest before dawn, but then again, other times it’s always darkest before pitch black”
On the other hand, if there is no permanent damage to its business, then the advice from Warren Buffett might be more apt:
“The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table”.
What You should do
In order to stay calm and think straight in the face of the price decline, ask yourself the following questions:
- Why did you buy the share?
- What business changes has happened?
- Does that change affect your reasons for investing in the company?
This approach requires you to reflect back on your investing style and what went through your mind when you first bought the stock. The first question will be an easy one. Did you buy a company because of its strong fundamentals? Did you do your homework beforehand to understand the company or did you purchase it because a certain report said it will soar?
After knowing the reason of buying the stock, you have to grapple with the decline in stock price now. If your shares have gone down in price, there is usually a reason for it. Determine whether the drop in share prices is due to temporary bad news or permanent poor business operations.
Lastly, let’s proceed to the third question: is the change material enough that you would not consider the company again if you were to invest your money? Try combining the answers you have for questions 1 and 2.
If you have bought into a share due to hearsay on the street that it will soar but you see that the underlying company fundamentals aren’t really improving — it might be better to take a hard look at the company, and consider putting the money somewhere. On the other hand, if you re-evaluate your investment considerations and find that the firm is still fundamentally strong, load it up like what Buffett would do when there is bloodshed in the markets.
Foolish take away
It is vital to review your purchase decisions when something goes wrong with its business or its operating environment. If you have made a mistake, bite the bullet and learn from it wisely. Opportunities are aplenty for you to start over again. Lastly, remember not to get too emotionally attached to companies, the occasional sell may sometimes be good for your financial health in the long term.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.