Keep calm and hang on to qual­ity stocks

Many com­pa­nies have had a rough time of it, with share prices trad­ing down. But don’t panic and sell. This is what it means to be a long-term in­vestor.

Finweek English Edition - - MARKETPLACE INVEST DIY - Edi­to­rial@fin­week.co.za *The writer owns shares in Wool­worths, Sho­prite and Richemont.

twoof my long-term “’til death do us part” stocks have had a rough 12 months. Wool­worths* hit a high of al­most R104 in late 2015 and is now trad­ing down around 6 500c. Richemont* was R115 in De­cem­ber last year and is now just above 9 000c. Nei­ther price drop is a fun ex­pe­ri­ence but I can prom­ise you this is part of be­ing a long-term in­vestor, watch­ing a stock you own col­lapse; it’s hap­pened be­fore and it’ll hap­pen again.

Back in late 2012, Sho­prite* was around R200 be­fore los­ing about a third of its value over the next few years. But re­cently we’ve seen it on the move again, trad­ing up above R210 in Au­gust and I held on to the po­si­tion, adding more and col­lect­ing div­i­dends along the way.

This is the crit­i­cal point – qual­ity will al­ways re­cover in time and will, via div­i­dends, pay you to hold it.

With Woolies and Richemont I am get­ting emails and di­rect mes­sages ga­lore from in­vestors ask­ing what we should do. I am also get­ting a bunch of dooms­day mes­sages telling me how these com­pa­nies have had their day in the sun and that it’s all over for them. Frankly, this ig­nores the big­ger pic­ture and is rather fo­cus­ing on short-term price move­ments, very much more a trad­ing outlook than that of a longterm in­vestor.

To deal with the first ques­tion of what we should do – well, we should buy more. I have been buy­ing both as the prices have fallen. With Woolies it has been years since I last bought as I have con­sid­ered it ex­pen­sive and hence have not been a buyer. But even­tu­ally all stocks of­fer an op­por­tu­nity to buy them at great prices. How­ever, too of­ten, the great price scares us as we’re con­cerned the com­pany is on its last legs (we in­cor­rectly as­sume as in­di­cated by the fall­ing price), so we panic and miss the op­por­tu­nity the mar­ket of­fers to buy qual­ity at great prices.

Re­mem­ber, price is what you pay and is the view of the mar­ket. It does not in­di­cate qual­ity. Some peo­ple have asked why I didn’t just sell at R100 and now buy back at much cheaper and the an­swer is sim­ple – hind­sight bias.

Sure, it is now easy to see where we should have sold Woolies, but I have rated it ex­pen­sive for years and would have sold much lower down. In other words, we will not get the top right. I would also have missed out on div­i­dends and would have had to pay cap­i­tal gains tax and bro­ker­age when I sold and very likely would have strug­gled to re-en­ter at a lower price.

So, for­get try­ing to time the price and rather fo­cus on qual­ity. We should check that we hold qual­ity and I have gone back to my notes on Woolies, mak­ing sure that what I liked about them still rings true and that I am still happy to own the stock.

This brings the sec­ond is­sue that al­ways arises when great stocks fall and that is the fear that the game is over for them. In some cases, it may be, but most of­ten qual­ity stocks will out­live us. Woolies was very ex­pen­sive at over R100 and that wasn’t go­ing to last for­ever. Fur­ther, con­sumers are un­der pres­sure and new cloth­ing re­tail­ers are giv­ing the lo­cals a run for their money. Woolies also has its Aus­tralian ad­ven­ture (which at the time, I said, would take longer to do well than promised).

But con­sumers will re­cover, Woolies will get back to pump­ing prof­its again and its Aus­tralian ven­ture will start to kick in. This is just a tough time for the price, it’s not the end of their world.

This is the crit­i­cal point – qual­ity will al­ways re­cover in time and will, via div­i­dends,

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