Crisis is Mega Sales
Recently I was having dinner with a friend and he shared with me this story.
In 2008, during the crisis, one of his friends who happen to be an analyst in the USA called him up and recommended for him to buy a banking stock. He told his friend, “Dude, this is a financial crisis. Isn’t it crazy to buy a bank?”
The friend replied, “If you don’t buy a bank during a crisis, when else do you want to invest in a banking stock?”
I will usually share a scenario in my talk, which I call the Toilet Roll story. Yes, the toilet roll that we use daily. It goes like this:
Assume our favourite toilet roll brand, Big Roll, sells for RM10 a pack. One fine day, Mega Mall has this special promotion, and is selling Big Roll for RM8 a pack. What will we do? We will go to Mega Mall, a grab a few packs of Big Roll. We will probably stock up say 4 to 5 months’ worth of supplies.
A week later, Mega Mall decides to do a mega stock clearance of Big Roll, selling at RM6 per pack. Again, a likely reaction would be to grab more, maybe a year worth of supplies, since we are using it and it’s not perishable. One week later, there is a shortage of Big Roll toilet rolls, and Mega Mall increased the price to RM14 per pack. Well, at this juncture, no one in the right mind will go and buy. In fact, I usually joke that I’ll sell the packs that I have acquired.
Now, I believe most will agree to the reactions of the above scenario. Now, let’s change a little detail. Assume Big Roll is not a toilet roll, but a listed company that we are familiar with, called Big Roll Bhd.
We started investing in Big Roll at RM10. One week later, the price of Big Roll fell to RM8. Alarm bells start ringing in our heads. We start calling brokers to check for negative developments in Big Roll. Most reply that they are not aware of any adverse developments.
One week later, Big Roll’s share price fell to RM6. All hell breaks loose, and all we think of is how to cut our losses and forget about checking for any developments anymore. We do just that and somehow, we feel glad that we actually cut our losses and moved on.
A week after that, when the market realises there are no adverse developments in Big Roll, its share price rallies and hits RM14. And since the price momentum is back, we jump in.
The above may be a little extreme, but you get the point. The reality is that investing in a company undergoes the same decision-making process as buying any other daily necessity items. We buy when there is a bargain and avoid when the price is excessive. But somehow our mind is wired differently when it comes to buying shares. We avoid when the prices are falling and we buy when the price is high.
Only Invest if You Believe in the Product or Services
Of course, there is a caveat to the previous Big Roll Scenario. The above scenario is only true when it’s the same toilet roll that you are familiar with and not some defective or imitation toilet roll.
Similarly, the above strategy only applies provided it happens to a company that you are familiar with and understands.
Do not use the same strategy when dealing with companies that you have no clue about. In most cases, what goes down may never go up, like toilet rolls being flushed down the toilet bowl.
The general rule of thumb is that you must believe in the products or services of the company before you invest in the company.
In most of my investments, especially in the consumer product space, I discovered the company because I like their products. When the funds I was managing owned Petronas Dagangan, one of the retailers of gasoline in Malaysia, I will only refill gasoline at Petronas kiosks. It makes basic sense. Have you ever encountered a business owner who will not buy their own products but those of competitors? Definitely not. Yet in most cases, investors will invest in a company but support products or services of competitors. Why? The simple reason is that they do not view investment as investing in a business, but more as a trading tool.
Over the course of interviewing candidates, I once came across a very interesting analyst. The analyst was trying to convince me how good Hyundai is and why I should invest in a particular Korean car maker.
The analyst was pretty convincing with all the USA quality survey statistics. I don’t know how or why but I suddenly chose to ask what car the analyst is driving. The analyst replied he just bought a European model.
I then asked the analyst since the price of this particular model is similar to the Korean make that he was talking so convincingly about, then why didn’t he get that? And the analyst’s reply? “I am not so sure of the quality of this Korean car”.
Long-term Investing – Till Death do Us Part?
I feel there is a general misconception towards the concept of long-term investment.
For most, long term investment is basically: buy into a company, forget about it, and hold it until retirement. However, this is not the case.
Long term investment means the intention at the inception of the investment. Either the investor invests into a company with the intention to trade or to grow with the business. Assuming it is the latter, post investment, the investor needs to continuously monitor the progress and direction of the company.
Buying and ignoring is not long-term investing. It’s blind investing. And there is a joke that says there are generally two types of investors. One is long term by choice, and the other is long term due to circumstances.
In the next chapter, we will discuss on the topic of when to sell.