“When it’s time to panic, panic quickly.”
These words from my grandfather again rattled through my head as investors and traders watched in shock as Steinhoff’s share price collapsed – a collapse like nothing I have ever seen before.
My grandfather had taught me about stock markets in the 1980s when I was still in school, and this was one of his key mantras.
I never really got it right until the MTN debacle of 2015. I was on holiday at the time and I was an MTN shareholder.
I was amazed that they’d disregard their regulator and seriously offended that it took them until about 2pm on that particular Monday to finally issue a SENS announcement on the matter.
As soon as the SENS arrived, I sold 100% of my MTN holding at about R175 – and have never looked back.
My grandfather was always saying this for a few reasons. Firstly, he always wanted to avoid a significant loss in any one investment.
Now sure, with investing your downside is capped at 100% while your upside is unlimited, and it is this asymmetry that helps investors grow serious profit from the market.
But if we can avoid the 100% losses, we’ll do even better.
He was also suggesting a quick exit as news flow and the response is asymmetrical. It breaks at once, but different people get it at different times and respond at different times.
Some wonder if it is as bad as feared, while others wait for recommendations from brokers that may take a few hours or even days. If we can get to the exit before others, we’ll usually get a better price than those who follow later.
Lastly, his advice was about reputation. As Warren Buffett says, “It takes 20 years to build a reputation and five minutes to ruin it”. Looking at MTN, we can see that the share continues to languish at around R120, even as they have resolved the Nigerian issue and replaced responsible executives.
More recently we saw the same with Rolfes and Consolidated Infrastructure Group. Bad news breaks and the share price collapses, but it continues to collapse. And if the MTN example is anything to go by, share price recovery will take a very long time.
The second part of my grandfather’s advice was that an investor should never be in a hurry to buy a stock. This also applies here. A ruined reputation is serious and coupled with financial issues can depress a share price for years.
Frankly, maybe forever. Even if the company comes clean and fixes the issues, the taint remains and the price remains under pressure.
This of course all applies to Steinhoff, and of course is far too late to help those who were holding the share when it broke. But as the news happened, an exit of above 2 000c was very easy, while it eventually went below 600c.
The market teaches us lessons and we need to heed these lessons. Remember this collapse, and study it because it will happen again to another stock that you may be holding. If so, remember my grandfather’s advice – “when it’s time to panic, panic quickly”.
Simon Brown is the founder and director of investment website JustOneLap.com and a regular finweek contributor.