I think it’s fair to say the Aston Martin (LSE: AML) share price has been an absolute disaster for long term investors. As I write, the stock is changing hands at just under 50p, compared to its IPO price of 578p.
Investors who’ve held onto the stock since the company’s IPO in October 2018 have seen the value of their investments fall by around 91%. Here, I’ll look at five key lessons from this share price crash.
Aston Martin share price crash
The performance of Aston Martin over the past two years is a good reminder of why investing in cars is generally a bad idea. Sure, some models do increase in value in the long run. But most new vehicles lose value as soon as you drive out of the showroom.
Car manufacturers are no different. History is littered with bankrupt car manufacturers. Indeed, virtually the entire US car industry had to be bailed out in the financial crisis.
Just as some vehicles have increased in value over the long run, some car manufacturers have outperformed the pack. Still, on average, the industry has only destroyed money for investors over the past few decades.
This is a good reminder of why, before investing in a business, it’s essential to consider the fortunes of other companies in the sector.
The bankruptcy problem
As noted above, many car manufacturers have flirted with bankruptcy in the past. Aston Martin is no different. The company has been bankrupt several times in the past.
This could have been a warning to investors. In my experience, companies that struggle to stay afloat are generally poor investments.
Ignore the headlines
Some investors might have been attracted to the Aston Martin share price due to its luxury brand association.
However, just because a company owns a well-known brand doesn’t mean it’s going to be a good investment. In my experience, it’s always a good idea to ignore headlines like this and focus on the fundamentals, such as profit and debt.
Aston Martin share price IPO fuss
The fuss around the company at the time of its IPO caused its valuation to spike to £4.3bn. As we’ve since discovered, this was far too rich.
Investors were happy to pay up for the stock despite its poor track record of profitability bankruptcy. I think this is an excellent example that investing in IPOs may not be a sensible strategy. It may be a better idea to wait for a more appropriate entry point rather than getting caught up in the IPO hype. For example, as the company’s prospects start to improve, now may be a good time to buy.
Cut losses
The Aston Martin share price has fallen over the past two years as the company has lurched from disaster to disaster. Investors who have stuck with the business since its IPO might have been better off selling up and moving elsewhere.
Taking a loss on a stock can seem painful at first, but doing so is often a sensible decision, especially if a company is struggling to survive. In these situations, I think it’s better to sell up and move on, rather than risk further losses. Diversify away from the position may also be a sensible course of action.
