It was 2016, right in the middle of the China liquidity crisis. The poor investment sentiment that time was also aided by low oil prices. DBS (SGX:D05) reported poor financial results, mostly due to provisions made for loans to O&G companies. Everyone got worried that another financial crisis is here again. The stock price has fallen from $22 to about of $15.
The stock looked enticing with low P/E & P/B ratios. Many also deemed it as too big to fail. Despite this understanding, my focus was on the fact that the stock has corrected about 30% in 6 months and there is more to come. Thus, I did the “right” thing by waiting for the stock to fall further.
I was right, it corrected another 10% in about 1 month and I feel good about it. My wife (then girlfriend) bought it but I still didn’t. After all, how could I buy a stock at $13.50 when I thought it could go to $8?
Long story short, the story met a sad ending when $13.50 is nearly the bottom and has doubled both its share price and dividend over these years. Congrats to those vested.
Falling Knife? How?
DBS was a case of falling knife for me and I did not want to hurt myself trying to catch it mid-air on its way down (easier to pick it up after it fell to the floor).
I learnt that it is sometimes good to catch falling knives but I thought of a way to do it without hurting me that much.
As the knife is falling down, to be able to catch it, your hand must be of the same speed and in a downward motion. Also make sure that the knife is blunt where you won’t get hurt even if you grab it by the blade.
Confused? Let me explain, when a good company’s stock price is in decline, buy in tranches as you may need to buy more as it falls further down.
When a business is good (eg, clean management, big cash hoard, potential for future growth and good track record etc), the falling knife would be blunt and it would not hurt that much when you grab it, much like Monish Prabrai’s “Heads I win, Tails I don’t lose as much”.
Hence, if you see a stock going down due to one off events or Mr Market’s many tantrums, you buy it when it meets the conditions for a good company and its valuations are attractive. Do not wait for it to fall to the bottom and do not waste your time timing your entry to perfection.
Howard Marks writes –
I’ve never considered it a legitimate goal to say you’re going to invest at the bottom. There is no price other than zero that can’t be exceeded on the downside, so you can’t really know where the bottom is, other than in retrospect. That means you have to invest at other times.
If you wait until the bottom has passed, when the dust has settled and uncertainty has been resolved, demand starts to outstrip supply and you end up competing with too many other buyers. So if you can’t expect to buy at the bottom and it’s hard to buy on the way up after the bottom, that means you have to be willing to buy on the way down.
It’s our job as value investors, whatever the asset class, to try to catch falling knives as skillfully as possible.
Closing
When it comes to stock prices, the key lesson from my DBS experience is that only the foolish try to capture the first and last part of a stock’s move.
If you are confident in your analysis and the long-term fundamentals of the underlying business are good, you would have bought a wonderful company at fair or even cheaper price.
Predicting the subsequent movement of stock prices,or the next mood swing of Mr. Market is a sure-lose game. Focusing on where the earnings and cash flows of the underlying businesses are going to go long term is what you should do.
As Warren Buffett says, “Be greedy when others are fearful.” The investor who waits for the knife to fall harmlessly to the floor may be hurt the most.
Cheers