For investors who understand intrinsic value, as opposed to price, the stock market declines of recent weeks are “precisely what you want”, says Montgomery Investment Management.
In a note to investors, Montgomery Investment Management chief investment officer Roger Montgomery said many people fail to understand that ‘price’ contains no information about ‘value’.
If an audience of investors were asked whether they would buy their favourite listed company if share prices were 50 per cent lower, a “sea of hands would go up”, he said.
“Present those same investors with 50 per cent lower prices and far fewer rise to the challenge.
“Investing amid volatility is one of the most rewarding opportunities occasionally presented to investors and yet, because it also seems like an incredibly risky thing to do, very few investors take advantage of the opportunity,” Mr Montgomery said.
He added that in times of volatility and heightened apparent uncertainty, investors should treat buying quality shares with good prospects the same way they buy groceries.
“You actually want the share price to go down so that you can buy more. Share price declines, particularly those that are produced when everyone around you sees only doom and gloom ahead, are precisely what you want.
“But how do you know the shares are cheap? Without the beacon of intrinsic value, how do you know whether to buy more or to panic? Many investors don’t know the value of their shares. They frequently panic when shares fall, and also suffer from the consequences of paying too much,” he said.
The reason that investors fail to take advantage of share price declines is that stock market falls are often accompanied by bad news, Mr Montgomery said.
“And unfortunately, such news often perverts good ideas to bad ones. What was seen initially as a brilliant opportunity becomes a high risk ‘play’ that should be avoided until there is more certainty (and a higher price of course).
“Nobody should miss out on buying shares in great businesses because of the fear that the shares will go down even more. And there is no need to panic and sell at depressed prices either.
“But such rational behaviour requires you to have something other than the price to look at. You need to know the value of the business and its shares.
“Only if you are confident that the business is actually worth $15 per share are you able to see a fall in the share price – from $12 to $6, for example – for what it is: a terrific opportunity. The right response is to buy more,” he said.