Buy­ing shares in a dust storm


The Citizen (Gauteng) - - BUSINESS - Di­neo Tsamela

Don’t buy cheap shares on a whim. Do your home­work.

There’s an adage in stock mar­kets to never catch a fall­ing knife. Buy­ing shares is based on the premise that the share will ap­pre­ci­ate over time. How­ever, this can’t be done on a whim. In­vestors must drown out the noise, fo­cus on what’s known, then make an in­formed de­ci­sion.

When you think you’ve found an op­por­tu­nity, first think about the long-term con­se­quences. In­ter­ro­gate the var­i­ous el­e­ments that could have a ma­te­rial im­pact on the share price cur­rently, in the near fu­ture and over a longer pe­riod.

Stein­hoff is a case in point – the share fell over 90% on news of ac­count­ing ir­reg­u­lar­i­ties – but has since started re­gain­ing some lost ground as a new struc­ture slowly weeds out the prob­lems.

It’s tough to get the tim­ing right and to make de­ci­sions in the eye of the storm – and when a once-great stock sud­denly ex­pe­ri­ences a pe­riod of weakness, in­vestors are of­ten tempted to try to buy again at some point.

How­ever, the re­ac­tions and con­fu­sion around when and why one should buy an in­cred­i­bly cheap share come into fo­cus as peo­ple keep won­der­ing: is this a good share to buy?

One of the best ways to make more in­formed de­ci­sions is to work on your check­list. Ex­plore why the share price is fall­ing so fast. The an­swers are wide and var­ied. Did the stock have a poor re­port­ing pe­riod? Is there a scan­dal? How has the stock done in pre­vi­ous months? Is this a once-off event or could it hap­pen again?

Try to gather as much in­for­ma­tion around the “why”, so you un­der­stand why the share’s be­hav­ing this way.

Next, in­ves­ti­gate if there has been any guid­ance from man­age­ment. In some cases, there’s a shock event that re­quires man­age­ment to speak out and quell the angst around their stock.

Find out if man­age­ment has given an up­date and go through the de­tails. Some­times there are events that oc­cur that are out­side man­age­ment’s con­trol, e.g. a fire. Oth­ers are internal mat­ters. The guid­ance from man­age­ment should clar­ify this and hope­fully give some in­di­ca­tion of a way for­ward. Some­times the di­rec­tion comes a few days later – fol­low up. Other points to con­sider: Is this some­thing man­age­ment could con­trol? Some­times stocks strug­gle be­cause of bad de­ci­sion mak­ing, e.g. the En­ron scan­dal.

Look for reg­u­la­tory bod­ies’ re­sponse. If the fault is with man­age­ment – and a sce­nario sim­i­lar to En­ron sur­faces – then it’s very likely reg­u­la­tory au­thor­i­ties will step in and is­sue state­ments. It might be worth wait­ing for, es­pe­cially if there’s still a great deal of un­cer­tainty around the stock and a pos­si­bil­ity that list­ing rules have been vi­o­lated which may lead to delist­ing.

Once you’ve out­lined this, you’ll be able to build a more in­formed best- and worst-case sce­nario map, and make a smarter in­vest­ment de­ci­sion.

Don’t get caught up in a frenzy and run with mar­ket com­men­tary when you haven’t come to an un­der­stand­ing of what’s go­ing on.

Di­neo Tsamela is at Stan­dard Bank On­line Share Trad­ing. Gareth Bai­ley is at Pam Gold­ing Prop­er­ties.

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