Last month, I had a conversation with a new investor. Here?s how the conversation went:
New Investor: I made a mistake with
Me: ? oh, what happened?
New Investor: It?s down 10%
At that moment, I recognized had enjoyed substantial share price gains in 2013, and was relatively flat for 2014.
Me: ? erm, when did you buy it?
Friend: One month ago
To be sure, it wouldn’t have mattered what was in this case. In my opinion, it is likely too early to judge if we…
Last month, I had a conversation with a new investor. Here’s how the conversation went:
New Investor: I made a mistake with [company x]
Me: … oh, what happened?
New Investor: It’s down 10%
At that moment, I recognized [company x], and was curious why that was the case. After all, [company x] had enjoyed substantial share price gains in 2013, and was relatively flat for 2014.
Me: … erm, when did you buy it?
Friend: One month ago
To be sure, it wouldn’t have mattered what [company x] was in this case. In my opinion, it is likely too early to judge if we made an investing mistake for any company after only a single month. Furthermore, the direction of share prices are hard to predict in the short term.
It’s the business performance that matters
It’s worth repeating that we should always keep our eyes on the business behind the share ticker. When we stay true to studying the underlying business, the chances getting new information — within a month — that can break our investment thesis would be very low. This is especially true when we consider that companies usually report earnings once a quarter.
Therefore, it would be an investor’s mistake to label this case as an “investment mistake”.
Business updates tend to come quarterly, but the share price of a business is shown in real time. As such, it is likely that the thought of the “investing mistake” originated from the drop in the share price. Avid Foolish investors may be aware that looking at share prices can cause the private investor to come to conclusions which turn out to be untrue. And this includes thinking that we have made an “investing mistake” because of a share price drop.
If anything, an investing mistake would be better defined as the permanent loss of value in the underlying business, and not because the share price dropped.
In all, this conversation reminded me of a tweet that I saw the other day:
killer: "In the end, everyone agrees that it’s the long-term that matters until the short-term starts happening." – @ReformedBroker
— Patrick OShaughnessy (@millennial_inv) December 17, 2014
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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.