In my previous post, I suggested that investors watch stocks they are interested in before plunging in. The title of the post was “Patience is Perspective.” In my thirty years of investing waiting has rarely cost me money. Trying to catch a falling knife has. Because I tend to buy “fallen-angel” growth stocks, waiting for the dust to settle is imperative. Fallen-angel’s present the greatest difficulty and the greatest potential for the value investor.
Fallen-angel growth stocks are well-managed, fast-growing companies that have unexpectedly hit a road bump (higher raw material costs and consequently shrinking margins: Coca Cola in the 1980’s, slower sales or, worse, obsolescence due to new competition: Eastman Kodak–who?–and the emergence of digital film, or new, ground-breaking technology which impacts the primary product offering: Hewlett Packard in the shadow of the iphone and ipad). Because growth stock investors tend to focus on price momentum they are rarely patient with earnings misses and often unload the stock at the first sign of weakness. The fallen-angel stock presents a great opportunity for the value investor but the important thing is not to become too eager to buy a former growth icon. Value investors must remember that growth stock investors can and will bail out of a stock much quicker than the more price sensitive investor can accumulate holdings.
So, what to do?
As soon as a stock disappoints, add it to your wish list. Begin tracking the price. And wait. The former darling will pass through the three stages of stock market grief: disappointment, hate and finally, neglect. Neglect is the point when the stock price flat lines: the intelligent value investor’s buying opportunity.
Next post we will examine the price performance of an actual fallen-angel growth stock.
“Even if you’re on the right track, you’ll get run over if you just sit there.”
One of the reasons individual investors abandon the stock market is because they fear they can’t compete with the Wall Street pros. And, generally that is true. We can’t compete with them on day to day or intraday trading. They are setting up the game and driving the narrative. They are in the middle of the action and we are home with a computer and a TV and dinner in the over. I’ll happily concede the day trading to the pros. I would rather follow a civilized and proven strategy of investing for the long term.
That is not to say that long-term investing is easy. It is not. Often we are buying in the face of market sell-offs and the talking heads are predicting that it is different this time. That what’s worked in the past, will work no longer.
In my thirty-plus years of investing in and watching market trends, I have found that employing common sense and patient discipline are the primary factors to success as an investor. Following the trends is a dangerous game–you must be incredibly agile or you may just get run over.
So, begin by watching the stocks you are interested in. Observe how they perform in up and down markets. And while you’re on the sidelines you’ll learn a great deal about how the game is played, be more likely to see the train coming. Patience lends perspective and provides cover from the speculators. By watching and learning you will become a better investor when you finally do decide to jump on the stock market locomotive.