“The key to making money in stocks is not to get scared out of them” — Peter Lynch.
I have written many times about my investing successes. But what about my failures and my mistakes?
There is no better example of this than Quindell (LSE: QPP). I began the year full of optimism about this company’s prospects.
After all, this was one of the country’s fastest growing companies. As I said, “in a few brief years it has appeared from nowhere to be a company worth nearly a billion pounds”. This company was expected to grow earnings year after year, and yet was incredibly cheap. It was a clear buy.
Mea culpa
Sometimes, even when you try to make sure your investment is watertight, you can still make mistakes. I checked all the fundamentals with Quindell: the P/E was cheap; the forward P/E ratio was even cheaper; the growth rate was impressive; the company had no net debt. This seemed to be a no-brainer investment.
But instead of the share price rocketing, it fell, and fell, and fell.
What can you say when a company has all the attributes of the ideal investment, yet instead of soaring, it falls from the sky? What can you say when all the fundamentals point in one direction, yet reality takes a quite different turn?
My answer: you just take it on the chin, after all, this is the nature of stock markets. Whatever the fundamentals may be, sometimes share prices rise, and sometimes they fall. These things happen. Mea culpa.
A P/E ratio of less than 1
But let’s strike a more optimistic note. Fast forward to today, and the share price is now a fifth of what it was when I tipped this company. The 2014 P/E ratio is 0.97, falling to 0.66 in 2015. This means that Quindell is now making its total market capitalisation in profits every year.
This company is thus astonishingly cheap. And although a lot of negative articles have been written about Quindell, I have not seen one which has questioned this profitability. Instead, they have focussed on the low cash flow of this company. But surely a business that is investing in its growth, rapidly expanding and buying companies will have a lower cash flow?
Once investors have calmed down and looked at the facts in the cold light of day, they will realise how cheap this company is, and – instead of being scared out of the stock – they will begin to buy back in again. So, if you are a contrarian who can stomach the ups and downs that growth companies such as Quindell inevitably experience, this is the time to buy.
To all those thousands of small investors who have already invested this firm, I would say: be patient, and have a little faith. Although your investment may seem in a precarious state, there is still much to be hopeful about.
