Your Shares Have Crashed! Here Are 2 Things You Should Never Say

Despite our best research efforts, the share prices of the companies we own may not co-operate with us in the short term.

Our homework may suggest that we have bought our shares at great prices, but the future is never certain – our shares may move to prices that are lower than what we think is possible.

When such a scenario occurs, it may be natural to have an emotional reaction to it. I have also noted two particular statements that I often hear or read about when such scenarios play out:

The share price dropped, it’s a buying opportunity.

The share price dropped, it’s the end of the company.

For me, the two statements represent two extreme opposites. And, I do not think both are exactly the right thoughts to have.

Businesses, not tickers

I may sound like a broken record. But this is really at the heart of this argument: We should remember that we are buying businesses, not tickers. The problem with the two particular statements I mentioned above is their focus on share prices alone.

In my opinion, the better way to approach a share price decline is to attempt to understand the developments in the company’s business. In focusing on the business, the more relevant questions in the face of a share price decline could be like the ones below:

  1. Is the company showing signs of losing its competitive advantage?
  2. Has there been irreversible damage to the business?
  3. Are the long term prospects for the company intact?
  4. Is the company still free cash flow positive?
  5. Does its balance sheet still have more cash than borrowings?

Going on share prices alone tells you almost nothing about what is happening at the business. Admittedly, a share price drop can be a good signal for us to check on the progress of a company’s business, but deciding on investing actions on the basis of share price movements alone may be something we want to avoid.

Furthermore, do remember that doing nothing is also an option we can take.

Foolish summary

Beating the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer the Straits Times Index (SGX: ^STI) – might be easier if we can keep our discipline and focus on the business behind the ticker.

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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.