The more I learn, understand and partake in the markets, the more I realise that many investors should not be investing in the stock market. Don’t get me wrong, I do believe that the stock market is the greatest wealth generating tool ever created but I just feel too many people don’t use it correctly. Most people treat the stock market like a casino as opposed to it allowing them the chance to buy ownership stakes in wonderful enterprises. Most don’t have the mental aptitude and calm persona to withstand short term volatility. They do the most wealth destructive thing by selling out low when a stock price moves downwards. And they wonder why they get mediocre returns.
Sage’s Friday share price fall was a classic example of this. On the day, Sage provided a trading update with the main focus being organic sales growth have gone down from 8% to 7%. This saw the share price fall from £6.70 to £5.44 – an 18% drop! In my view, the reduced revenue did not warrant this share price reaction. On all other accounts, the trading statement was good. Operating margin unchanged at 27.5%. Software subscription growth was 25.3%. Cash conversation strong at 95%. This was a good statements for a company whose valuation is at reasonable levels as compared to the market. Before the trading statement was released, Sage had a Free Cash Flow yield of 5.5% for 2018 and projected 6% for 2019 – not much of a premium as compared to the market and at a discount compared to its competitors. It would have been a different story if Sage traded at a P/E of about 30 but Sage was not expensive. The fall, clearly overdone.
On the same Friday morning, I received emails via the contact form from readers asking wether they should sell their shares in Sage. My standard answer is that I am not a registered financial advisor so cannot offer investment advice but I asked I wether they had read the trading statement and why they wanted to sell. A few people came back to me with the same answer, no they hadn’t yet read the trading statements but wanted to sell as the share price was falling and they didn’t want to lose any more money. What?! really?! This is exactly why many investors don’t make any money on the stock market. They treat is essentially as gambling. They don’t understand the company they are invested in and simply buy and sell shares on a whim.
I believe shares in quality companies like Sage should not be sold without any fundamental change in the business. I bet those people who sold their shares on Friday will be kicking themselves! Many astute investors realised Sage is one of the highest quality businesses on the FTSE and bought shares at a discount driving the shares up so that Sage closed at £6.14 for the day – a 12% rise from the intraday lows. Easy money.
I write this time and time again but as an investor you should not panic when shares in the company you own fall. You need to assess the business and work out its intrinsic value. Shares may fall for many reasons. As seen from the above, many people who don’t understand the business sell shares just because the price is falling which compounds the problem and sends the price cratering even lower towards absurd levels.
This phenomena seems to occur with BP a couple of years ago. Many people who didn’t understand the drivers of the oil price and the workings of an integrated oil company seemed to panic and sell their shares at at the bottom of the market. I took the opportunity to buy shares in BP when other were fleeing. I bought shares at £3.34 a piece. The shares offered a stunning 8% dividend yield! Insane. Today, the shares I bought in BP in the midst of the oil price crash of 2015/2016 have gone up in price by 50%! Further to this, BP has paid me dividends totalling just over £400 during this time giving me a return of 73% with two years! And I know better than to sell my shares in BP. This is a company whose shares I plan on holding forever and I shall continue to reap the £150+ in dividends they send my way every year and I’ll treat any capital appreciation as a bonus. Holding on to shares in quality companies when everyone else around is you is panicking sure is rewarding. I bet the people that sold BP shares at their lows are kicking themselves.
If you are a level headed investor who does your research, this is where your edge comes in. These panics allow you the chance to acquire an ownership stake in quality businesses at discounted levels. In a way, reckless gamblers are good for the stock market as them selling at lows allow me to buy shares cheaply.