The Worst Reason to Not Sell Your Shares

On Saturday, local business newswire The Business Times published an article titled “Noble dodges accounting queries at AGM.”

As the article’s title suggests, it was a recount of some of the things that happened during commodities trader Noble Group Limited’s (SGX: N21) recent annual general meeting. While I won’t be going into the specifics of what went on during the AGM, there was something in the piece which caught my eye:

“Having held Noble’s shares for over a decade, Mr Lau [a shareholder who attended the AGM] added that the firm’s share price is “so depressed now, it’s no point (to sell)”.”

The quote above captured my attention because it highlights one of the worst reasons an investor can have for not selling his shares in a company.

It’s-pointless-to-sell-because-it’s-so-low-now is a horrible reason to hang on to our shares because: 1) A depressed share price can go on to become way lower as a result of deteriorating business fundamentals; and 2) the opportunity costs of sticking with a losing proposition can be very painful.

To illustrate the two ideas, classified ads outfit Global Yellow Pages Limited’s (SGX: Y07) experience can make for a great example.

It’s darkest before it goes pitch-black

Global Yellow Pages’ shares were first traded on the stock market on 9 December 2004 and had closed at S$1.75 back then. But just some six years later at the start of 2011, the company’s shares had lost 89% of their value and were worth just S$0.185 apiece.

If you’re an investor who had bought into Global Yellow Pages back in December 2004 and had held on till January 2011, it’s easy to adopt the mindset of “It’s so depressed now, how much lower can it go?”

But here’s the thing, the company’s shares are exchanging hands at S$0.041 apiece today – that represents a 78% decline from S$0.185.

The company’s dismal share price returns over the past 10-plus years were the result of declining business fundamentals as demonstrated by the firm’s falling profits. You can see these in the table below:

Global Yellow Pages' business and share price history

Source: S&P Capital IQ

When deciding to hold onto a company’s shares, the decision should be made on the basis of an upcoming or ongoing improvement in the company’s business. If the firm’s business is staring straight into the abyss, there’s just no telling how low a firm’s shares can go.

Missed opportunities can hurt

Global Yellow Pages’ 78% decline in price from 1 January 2011 to today is also a stark reminder that opportunity costs in investing are very real.

Let’s say an investor – let’s call him Peter – had pumped $10,000 into Global Yellow Pages when it got listed. On 1 January 2011, that $10,000 would have shrunk to $1,100. But if Peter had left the remaining $1,100 in Global Yellow Pages’ shares, he would have a pitiful sum of just S$244 to play with today.

If he had instead decided to cut his losses on 1 January 2011 and switched to say, a simple index tracker like the Nikko AM STI ETF (SGX: G3B), an exchange-traded fund which closely mimics the fundamentals of Singapore’s market benchmark the Straits Times Index (SGX: ^STI), Peter’s $1,100 would have become more than S$1,200 now.

A Fool’s take

To be fair to Mr Lau, he did also mention that Noble’s “in a good sector of the business” and from that, it can be deduced that he’s holding onto the company’s shares partly because he thinks it’s a good business.

But still, it’s hard to tell from his comments which factor holds more sway in his mind. Is it the idea that Noble’s a good business, or is it the thought that it’s-pointless-to-sell-because-it’s-so-low-now? A decision on whether to hold Noble’s shares would have a much stronger investing foundation if it’s based on the former as compared to the latter.

When you’re confronted with a similar situation as the one Mr Lau’s facing with Noble currently, keep in mind that any decision to hold on to any particular company’s shares should be made, first and foremost, with the strength of the company’s business in mind.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.