Keep calm and hang on to quality stocks

Simon Brown, founder and director of
Simon Brown, founder and director of

Two of my long-term “’til death do us part” stocks have had a rough 12 months. 

Woolworths* hit a high of almost R104 in late 2015 and is now trading down around 6 500c. Richemont* was R115 in December last year and is now just above 9 000c. Neither price drop is a fun experience but I can promise you this is part of being a long-term investor, watching a stock you own collapse; it’s happened before and it’ll happen again. 

Back in late 2012, Shoprite* was around R200 before losing about a third of its value over the next few years. But recently we’ve seen it on the move again, trading up above R210 in August and I held on to the position, adding more and collecting dividends along the way.

This is the critical point – quality will always recover in time and will, via dividends, pay you to hold it. 

With Woolies and Richemont I am getting emails and direct messages galore from investors asking what we should do. I am also getting a bunch of doomsday messages telling me how these companies have had their day in the sun and that it’s all over for them. Frankly, this ignores the bigger picture and is rather focusing on short-term price movements, very much more a trading outlook than that of a long-term investor. 

To deal with the first question of what we should do – well, we should buy more. I have been buying both as the prices have fallen. With Woolies it has been years since I last bought as I have considered it expensive and hence have not been a buyer. But eventually all stocks offer an opportunity to buy them at great prices. However, too often, the great price scares us as we’re concerned the company is on its last legs (we incorrectly assume as indicated by the falling price), so we panic and miss the opportunity the market offers to buy quality at great prices. 

Remember, price is what you pay and is the view of the market. It does not indicate quality. Some people have asked why I didn’t just sell at R100 and now buy back at much cheaper and the answer is simple – hindsight bias. 

Sure, it is now easy to see where we should have sold Woolies, but I have rated it expensive for years and would have sold much lower down. In other words, we will not get the top right. I would also have missed out on dividends and would have had to pay capital gains tax and brokerage when I sold and very likely would have struggled to re-enter at a lower price.

So, forget trying to time the price and rather focus on quality. We should check that we hold quality and I have gone back to my notes on Woolies, making sure that what I liked about them still rings true and that I am still happy to own the stock. 

This brings the second issue that always arises when great stocks fall and that is the fear that the game is over for them. In some cases, it may be, but most often quality stocks will outlive us.

Woolies was very expensive at over R100 and that wasn’t going to last forever. Further, consumers are under pressure and new clothing retailers are giving the locals a run for their money. Woolies also has its Australian adventure (which at the time, I said, would take longer to do well than promised). 

But consumers will recover, Woolies will get back to pumping profits again and its Australian venture will start to kick in. This is just a tough time for the price, it’s not the end of their world. 

*The writer owns shares in Woolworths, Shoprite and Richemont. 

This article originally appeared in in the 8 December edition of finweek. Buy and download the magazine here.


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