A few month ago, I bought shares in both Creightons and RWS Holdings PLC. I bought shares in Creightons for 29.5p a piece and RWS for 374p a piece. Subsequent to my purchase, the shares prices of both companies fell due to poorly received trading statements. But I was calm. I knew the market had overreacted as it has done many times over the past 2 years. Creightons fell to19p. RWS fell to 350p
The fall in share price for Creightons in particular baffled me. Creightons trading statement indicated that margins might be lower than expected due to having to outsource production due to business being better than expected. Yes that’s right. Creightons had too much business on hand and in the short term had to outsource some production until it builds additional capacity. And the share price fell as a result of this. Bizarre. Sometimes I would love to know what investors think. To drive a company’s share price down by over 35% when it is trading better than expected is simply crazy!
I got a glimpse of this irrational investment behaviour over the past few months. I had a number of readers write in to me to say that they had followed me into both Creightons and RWS. My first reaction was Whaaaat?!
To make it clear, I do not give financial advice of any nature. Just have a read of the disclaimer on the sidebar of this site. Secondly, why are you blindly following someone on the internet when making your purchases?! It is as if you have no regard for your hard earned money. I have mentioned many times before, only invest in businesses you understand. By blindly following someone, you will not understand the underlying economics of a business. You will panic at every share price fall. You will sell just because of the share price is going down. You will not understand that the value of the business is increasing.
When it comes to investing in stocks, particularly in the small cap sector, you have to have the stomach to see huge share price moves. Small cap stocks are often illiquid a thus even trades of low volumes can move the stock by a big margin. The volatility experienced is not for the faint hearted. Case in point Creightons and RWS which had dropped 35% and 7% from my respective purchase prices.
If you understand that volatility is a normal part of the stock market, you will be able to hold on when others are selling. This is exactly what I did. By doing so, I have reaped the benefits of not being in a state of panic and selling prematurely. Today, the share price of Creightons and RWS are up up by 45% and 30% from their respective lows. All it took was a bit of patience.
Investing particularly in small caps requires patience. It can take ages before the market sees that value in a particular stock. This is why I hesitate to write about small cap stocks on this site as I believe most investors don’t have the required mental strength and patience to hold through share price falls. Most would simply panic and sell and lose money at regularity in the process.
This phenomenon of irrational price moves is not only applicable to small cap stocks. Even the biggest companies listed on the stock exchange can see their stock prices gyrate for no apparent reason. Case in point was Shire Plc which I wrote about.
Another example is Hikma pharmaceuticals. I first bought shares on the company in September 2016. After an initial rise in these share price, the trend quickly changed and the shares lost 57% of their value. But I knew this share price slide had nothing to do with the fundamentals of the business. The selling was irrational. So I kept buying shares in Hikma using my monthly stock purchase programme. As I kept buying at lower and lower prices, my average share purchase price kept going lower and lower. Today, the shares have rebounded and I am up a decent 25% on my purchase.
When it comes to stock market investing, you need to be patient and wait for your investment thesis to play out. The stock price doesn’t go up just because you have bought the stock. Instead, there needs to be a change in the markets perception of a particular stock. For you to benefit for this change in sentiment, you need to be able to have confidence in your investment decisions and hold through the volatility. As by being patient, you can reap the rewards of attaining high double digit returns.