In the final edition of Investing chronicles (for now), Lockstep CEO Paul Farah discusses the importance of looking beyond the share price, and why focusing solely on stock value can be deceptive.
Investing in stocks makes it easy to get fixated on daily price changes. As the market noise around you grows, you naturally start to wonder “Is now the time to buy?” or “Is it time to sell?”.
However, focusing only on the share price can be very misleading.
Understanding that the share price is just a number and doesn’t tell the whole story is crucial. Instead, you should focus on the actual VALUE of the business behind the stock.
Share price vs company value
Consider buying a house. You wouldn’t just look at the asking price, but also consider the location, condition, and other aspects. Along with the asking price, these considerations give the house its value, and you can quickly tell when a property is under- or overvalued.
The same goes for investing. The share price is merely what someone is willing to pay for a small piece of the company at a given moment; more important is what the underlying business is.
Focus on the business, not the price
The true value of a company lies in its fundamentals.
For example, if you had invested in Apple before the 2008 market crash, you might have been tempted to sell because the market was in a tailspin. However, Apple’s robust business model, the demand for its revolutionary products, and its solid financial health were more important than short-term price drops.
Despite the market downturn, those who held onto their shares have seen substantial gains.
Similarly, during the dotcom bubble in 2000, Amazon’s stock price fell by 90%. Yet, Amazon’s long-term potential wasn’t reflected in the share price at that time. People who focused on Amazon’s business model and future prospects saw significant returns as the company’s value became apparent over time.
When to buy
If you’re considering investing in a company, think about it as if you were buying a house.
Create a checklist of what you want in a company:
- What is its business model?
- How does the company make money?
- Who are its competitors?
- How difficult is it for competitors to replicate what the company does?
Then only invest in a company that matches your checklist. Once you’ve found a company that fits, look at the share price to decide if it’s a good buy based on your valuation.
Let’s say you’ve researched a company and determined that its shares are worth $13 each based on your checklist. If the current share price is $12, or even $10, it’s a decent time to buy.
What if the share price drops?
Well, if you believe it’s worth $13 per share, and due to pure market negativity the share price drops from $12 to $8 per share, then isn’t it an even better opportunity to buy?
In other words – buy when it makes sense to you based on what you believe a company is worth.
When to sell
There are several reasons to consider selling shares:
- Finding a better investment: If a new opportunity looks more promising, you might want to sell your current shares to invest elsewhere.
- Deterioration in quality: If a company’s financial health or business model weakens, it may be time to sell.
- Attractive offers: If you get an offer that exceeds your valuation of the company, selling could be a smart move.
However, avoid selling just because of market noise or economic concerns like a possible recession or inflation fears.
Focus on the company’s performance and fundamentals rather than external factors.
In summary
While the share price is a consideration, it’s only one part of the investment puzzle.
By concentrating on a company’s value, financial health, and business fundamentals, you’ll be in a better position to make informed investment decisions when those around you are panicking.
Investing is about finding valuable assets at good prices and maintaining a long-term perspective,
rather than reacting to daily price movements.
DISCLAIMER
Paul Farah has worked in financial markets since 2006, holding positions at prestigious firms from New York to South Africa. Now, he manages his own money and provides access to his entire portfolio through his company Lockstep Investing. The views and opinions shared are his own and are for informational purposes only, they are not intended to serve as investment advice and do not represent the views or opinions of Standard Bank. This information should be used as a starting point for generating investment ideas, and should not be relied upon as the sole basis for making investment decisions. Lockstep Investing (PTY) LTD and the Standard Bank of South Africa Limited will not be responsible for the results of any investment decisions made based on the views provided.
