WHEN A STOCK CRASHES:
DO I BUY MORE OR SELL IT IMMEDIATELY?
In our last write-up, The Essence of Investing, we’ve shared with you our revised investment methodology that uses the timeless value investing philosophy and is adapted for the present environment, called the H.E.R.O. methodology.
It is specifically designed to assist us in identifying companies with structural growth.
Especially with the stock market still down about 20%1 from its peak since 19th Feb 2020 in this time of market volatility, some of us might face the dilemma of deciding to buy more of a stock or to sell it immediately when the price has already been shaved by 20% or more.
Generally, there are two kinds of companies:
Type 1: Their stock prices crash in a crisis and recover 2-6 times or even more over time.
Type 2: Their stock prices crash and never recover.
Some examples would serve us well.
The first type are companies such as Microsoft, Asian Paints and QL Resources.
Most of us are probably quite familiar with Microsoft and its businesses.
Asian Paints is an Indian multinational paint company that is engaged in the business of manufacturing, selling and distribution of paints, coatings, as well as other products related to home decor2; whereas QL Resources, based in Malaysia, is involved in integrated livestock farming, marine products manufacturing and oil palm plantations, and is one of the largest egg producers in Southeast Asia3.
Microsoft’s stock price has risen 10 times since the last crisis. However, this does not mean that it has always been smooth sailing for the companies mentioned above. For a period of time, Microsoft was considered a has-been, losing out to Apple and Google. Now, Microsoft’s recurring revenue makes up more than 64% of their total4 and the company generates more than USD$30B in sales each quarter5.
The second type of companies are like Citigroup and Kingsmen Creatives.
We are also probably quite familiar with Citigroup. Kingsmen Creatives is based in Singapore and started out as an events and exhibitions company that also dealt with interior fit-outs for retail and commercial clients6. They also put together last year’s The Bicentennial Experience.
A company’s stock may not be a good buy or a good keep simply because it’s a familiar name or a local brand. And supposedly blue-chip stocks such as financials or telecommunications companies may not always yield the results you want as they are more cyclical and defensive, respectively, and usually do not enjoy structural growth.
The H.E.R.O. methodology allows us to separate the wheat from the chaff.
The stock prices of these companies over time speak for themselves. Kingsmen Creatives’ current stock price (shown on the next page) is 2.5 times lower than its listing price.
Do you think the companies in your portfolio are Type 1 or Type 2 companies?
“In the short run, the market is a voting machine but in the long run, it is a weighing machine,”
said Benjamin Graham, the father of value investing.
Similarly, we strive to select companies, mutual funds and ETFs that contain these structural winners via the H.E.R.O. methodology.
Do speak to your Unicorn consultant if you would like to know more or have further queries.
Note: We will increase the frequency of our communication with you to weekly during the current turbulent times. We will continue to communicate monthly with you during usual times.
1. Google Finance
3. Nikkei Asian Review
4. Microsoft Investor Relations
5. The Motley Fool
6. The Seedly Blog
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