I’ve just read this quote from Peter Lynch: “If I had to chose a great single fallacy of investing, it’s believing that when a stock’s price goes up, then you’ve made a good investment.”
What does the growth guru mean? Well, often when we buy a shares, we watch intently for the first few days, weeks and months after the purchase to see whether the share price has increased. If we see the share price rise, then we feel a buzz, a sense of relief and vindication.
If we see the share price come down, then we feel a sense of worry, fear, and sometimes panic. Have we made a mistake? Is it time to sell and cut your losses when you can? Just how low could the share price fall?
One of investing’s great fallacies
But this is a fallacy, because you are confusing prices with prospects. Share prices fluctuate all the time. Sometimes they rise, and sometimes they fall. Sometimes they are shorted, sometimes they rocket. To long-term investors, the short-term fanfare of a price rise, or the short-term scare of a price fall, means nothing.
What you need to focus on is not what is happening to the price of the company, but what is happening to the prospects of the company. The only time you should sell is when you think the prospects of the company are deteriorating.
I have written several times about fashion company SuperGroup (LSE: SGP). I have usually been very positive about this business, which I think has strong growth prospects. Yet in late 2011 and early 2012 (around about the time of the eurozone crisis), the company’s share price seemed to just keep falling and falling. It fell from a high of 1,800p down to 250p.
At the time, there was an accounting scandal — my memory is rather hazy now, but at the time investors seemed to be in a blind panic. Many investors were convinced the company was heading to oblivion.
The prospects are strong, and that’s all that really counts
But just as the investor panic reached its peak, it seemed to fade. And, you guessed it, the share price started rising. By early 2014 it had reached 1,700p. Whether you had walked into a Superdry shop this year or two years ago, you would have seen T-shirts, jeans and hoodies flying off the shelves. Anyone who had realised that the prospects of SuperGroup were still strong and had bought in at the height of this ‘crisis’ would have 5-bagged.
This is the reality of investing. This is why, even with growth shares, you need to have a contrarian mind-set. The time to buy is not when a share like Quindell (LSE: QPP) is the talk of investor circles, and excitement is reaching fever pitch. The time to buy is when investors are in a blind panic, or when there is so much apathy about a share that all you see is a few clumps of tumbleweed floating across the plain (think Barratt Developments at the time of the financial crisis).
My personal view is that Quindell has strong long-term prospects, and at current prices it is very, very cheap (a P/E ratio of 3 is almost unheard of these days). No-one can predict the bottom, but at these prices, believe me, you should be buying, not selling.
