Few people like to see shares they own tumble in value. But that is exactly the situation with my holding in aeronautical engineer Rolls-Royce (LSE: RR). The Rolls-Royce share price has fallen 43% in the past year. Longer term, the picture is also gloomy. The shares are worth less than a quarter of what they were five years ago.
I am hoping they may recover in the fullness of time. But, meanwhile, I think there is a lesson to be learned from the declining Rolls-Royce share price that could help me in future investing decisions.
The difficulties of market timing
That lesson, in short, is that market timing is a difficult investment strategy to employ successfully.
Market timing broadly means trying to guess the point at which a share hits a bottom, or indeed reaches a high point. That could be a lucrative approach in theory, if it enabled an investor to buy low and sell high.
But the problem as I see it is that timing markets is essentially impossible. If there was certainty about the direction in which a share would move next, people would pile in on that basis. Instead, what happens is that investors are making a judgement about what they think will happen next. That may turn out to be true – but we can often be surprised and disappointed by the way in which a share moves.
The falling share price
I would say that lesson has been brought home again in the case of the recent performance of the Rolls-Royce share price.
A lot of things that ought to be positive for the company’s investment case have happened in the past year. Demand for civil aviation has recovered strongly in many markets, helping to boost the firm’s revenues. The company proved it can return to profitability and free cash flow generation. While that has not yet been shown consistently, the economics of the business certainly look stronger than they did a couple of years ago.
Despite that, the shares have been falling.
My move as a long-term investor
So what does that mean for my move as a Rolls-Royce shareholder? Being reminded of the difficulty of market timing is often a hard but useful lesson. It can push me to focus on the fundamentals of a share. Instead of trying to time the market, I ask myself whether a company has strong long-term economic characteristics and trades at an attractive price.
The Rolls-Royce share price has fallen party because of the challenges the company faces. Its debt makes for a weighty balance sheet that could hurt profitability in future. Cost inflation is another risk to profits.
But I think the business has an attractive position in an industry I expect to see long-term demand and that has high barriers to entry. Its installed base means the engine maker should benefit from servicing revenues for years, or decades, to come.
So I am not worried by the share price fall, nor am I trying to time the market. Instead, I see the current Rolls-Royce share price as a good opportunity for a buy-and-hold investor like myself to increase my stake in Rolls-Royce. If I had spare cash to invest right now, that is what I would do.
