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1 Dangerous Investing Thought Investors Should Get Rid Of

On Tuesday night, an investor who’s part of my social media circle asked if she should buy the aptly-named U.S.-listed pharmaceutical company, Valeant Pharmaceuticals International.

She got intrigued after Valeant had opened that night’s trading session with a share price of US$52, some 24% lower than the price of US$69 that the company’s shares had closed at on Monday night. Valeant ended up falling by over half on Tuesday night and closed the trading session at a price of US$33.

What really got her attention though, was the fact that Valeant’s 52-week as well as all-time high share price was US$263.81. So, a price of US$33 represented a mighty, mighty tumble of nearly 90% – all in the space of less than a year.

I don’t think she had any solid intentions to buy Valeant at all. But, her question still highlighted a dangerous investing thought that I think investors should stay away from and that is, the idea that a stock’s attractive just because it has fallen hard.

I say it’s a dangerous investing thought for a good reason.

In a 2014 report prepared by American banking giant J.P. Morgan, it was found that 40% of all stocks in the Russell 3000 universe from 1980 to 2014 had suffered a permanent decline of over 70% from their peak values. The Russell 3000 is a broad stock market index in the U.S. that’s made up of thousands of companies. So as you can see, it’s very easy for a stock to fall big from a peak and then fail to recover, ever.

There’s a similar phenomenon in Singapore’s stock market too. On 15 January 2016, there were 813 equity listings in Singapore and on that day, I had tried to determine the number of stocks from that group that had met both the following criteria:

  • Is down by at least 50% from its all-time high
  • Its all-time high had occurred before 1 January 2010

What I found was that 41% of my universe of stocks had both characteristics. Given that the stocks’ all-time highs had happened more than six years ago, it’s likely that the losses of many of those in the 41% group are permanent. Just like stocks in the U.S., the Singapore stock market has more than its fair share of stocks that simply fall and don’t come back.

Some surprising stocks that were part of that group of 41% included Singapore Exchange Limited (SGX: S68) and Keppel Corporation Limited (SGX: BN4).

Singapore Exchange had reached its all-time high of S$16.40 on October 2007 and even today, at a price of S$7.84, it’s still sitting on a decline of over 50%. Meanwhile, Keppel Corp’s all-time high stock price is S$13.82 and it also occurred on October 2007. The company’s shares had closed today at S$6.05, so that’s a decline of more than 50% from the all-time peak as well.

Both Singapore Exchange and Keppel Corporation are considered blue chip stocks in Singapore as they are part of the 30 constituents of the local stock market barometer, the Straits Times Index (SGX: ^STI). As we’ve seen, even the blue chips may belong to an ignominious group of stocks that fall hard from a peak and don’t come back.

When you’re investing, it may not be a good idea to think that a stock’s a bargain just because it has declined drastically from a peak.

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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.