Yesterday I found the following email from early December.

“Just purchased MTU last friday at 1.64 and it is down now to 1.47 closing today. Bit discouraging, but as you suggested it might cross 2.00 mark, what would you recommend to sell it at a nominal profit price of any thing above 1.64 or wait it out.”

Salina, if you’re reading this sorry for the tardy reply, your message slipped through to the keeper.

Firstly, all my comments are general in nature and I am not qualified to provide financial advice. Second, I’m still learning and always will be so don’t rely on my valuations. Third this is a short article aimed to help new investors think, as such it contains many generalisations and less than expansive explanations. Finally, these are my opinions for long term investors.

If 10% wiggles in price cause you concern then you shouldn’t invest directly in shares. One of the worst aspects of shares is their frequent quotation. The wiggles play havoc with investors’ emotions. If the wiggles cause you lost sleep then you probably shouldn’t be a direct investor. However, if you’re determined to invest directly in shares and to learn and grow, then the best advice I can offer is look at major announcements from the company not the share price.  At the most look at your share prices once a month. [Speaking of major announcements MTU will announce their half year results tomorrow, Thursday 25th February]

If you can’t do a basic valuation of companies then you’re on a hiding to nothing. As Salina’s message demonstrates without your own reasoned valuation you’ll have no idea about what price you should buy or sell at. You’ll be at the mercy of the market and forever concerned about those wiggles. The valuation doesn’t need to be complex, a simple P/E based valuation is better than nothing, as it at least starts you on the path to thinking about value. There’s an example of a basic P/E matrix valuation in my original analysis of M2.

Taking a small loss is the best thing new investors can do. All to often new investors let small losses become big losses. Heck even I still do! Damn me TREES 3! While the debate over using stop losses is never ending, new investors will do well to consider themselves lucky if the price goes up and wrong if the price goes down. I don’t advocate a fixed stop loss, but if you look at the chart below you’ll see how once a loss goes over 20% making that loss back quickly gets much harder.

Taking a small loss teaches a good habit. Being flexible and realising you may be wrong will make you more money is the long run than holding on and hoping the stock goes back up so you can get out of even. If you’re nervous about a stock then sell. Remember you can always re-buy. Also remember opportunity cost, holding that dog has a cost.

Buy with a margin of safety. Buy at a discount. Pay less than what you believe the company is worth, lots less! Think mega closing down sale. If you’re buying with a wide margin of safety, i.e. the price is a lot less than value, then it doesn’t matter if your valuations skills are weak. The discount helps hide your valuation errors. For example, I value Woolworths at $32. I think an appropriate discount for a large cap stable company is 30% so I’d buy in the $22.50 range. Yes I’ll miss out on buying a lot of companies only to see the price go higher, but as I’ll cover next, that’s a good thing.

Avoid the need to trade. Most new investors want to buy and buy and then buy some more. Don’t do it! Use Buffett’s 20 punch-hole analogy, i.e. treat each purchase as one of the only 20 buys you’ll make in my life. While we’ll all buy more than 20, thinking that way focuses the mind and can stop the urge to buy.

Avoid chasing shares. Capital is scarce opportunities are plentiful.

Investing is a marathon not a sprint. I don’t care what the price of MTU is today, unless it is above my sell point or below my current buy point (not my original buy price). I care what it will be next year and the potential it has after that. At 42 I hope to be investing for another forty years. With that in mind the price wiggles become meaningless.

Salina’s message also demonstrates why technical support and resistance lines work. Investors are obsessed with not losing money. Once a share rises back to where there was previously large volume then there’s a lot of investors relieved to get out. The price then falls due to the increased sellers, hence resistance.

Back to Salina

Her first mistake was buying with no idea of the value of MTU. She then bought with no margin of safety. Thirdly she focused on the price wiggles rather than the fundamental story. That played havoc with her emotions and while I hope she didn’t sell, she would be typical of those who did sell at below $1.40 in mid December.

If I was to make a recommendation, which I don’t, I’d say read MTU’s 2009 annual report, do a rough valuation and then decide if it is one of your best current opportunities. If not sell. If that seems too hard, then sell and buy an index fund.

Investing in individual shares is a lot harder than most people think. I’ve been doing it for over twenty years and am only now getting comfortably with my decisions, granted I’m a slow learner.

Related posts:

1. Market Cap vs Enterprise Value vs Share Price vs Value
2. Investing Myths: Gain Required to Make you Whole
3. Stop Loss vs Double Down
4. How to Balance Growth and Value Investing