It is very hard for the amateur investor to be immune to share price movements. They get excited when share price goes up and at the same time, they get depressed when share price goes down. In fact, because of fluctuations in share price, many investors find it important to study the technical charts in order to find the perfect entry point.
However, if you have practiced technical analysis long enough you would have known that it is not always accurate. In fact, our team find many technical analysts saying that the markets are really unpredictable these days thanks to the tweets of US President Donald Trump. The idea that a simple post on social media can cause many investors to lose their wealth on the stock market is indeed troubling. However, if you understand what we are about to share in this article today, you will understand a very powerful idea: It doesn’t matter which direction the stock market goes, you will eventually make money even when share price goes down.
In order to do this, you need to understand only one very powerful concept: the power of conviction and market behaviour.
So what is conviction when it comes to investing? Conviction simply means a very firm belief or opinion on the stock that you have invested in. So how does one gain conviction? Basically by doing the homework themselves, that is to check through the facts which reaffirms their investment thesis on the company. This involves reading up about the industry, finding out who are their competitors, unearthing what is their competitive advantage in their industry etc. Obviously to do this, it requires the investor to follow the company sometimes for a few years.
For example, while doing a research on Malaysian listed company, Hartalega, we got obsessed with their business operations. Our team then organized visits to their factories to understand how they operate; Talked with their investor relations personnels regarding what they think about their company; Talked to their staff with regards to what they think about the company’s products and prospects. We have even attended their annual general meetings every year diligently just to get in touch with their management team. Sounds like a lot of time and work but is it worth it? How about a 200% return on your capital in less than 2 years? And the best part is, it only needs to be done once and the returns comes pouring in for a lifetime.
But the true power of conviction lies not in the returns but the ability to help the investor make more money especially when share price comes crashing down. If you bought a share for let’s say $50 and the share price drops to $25 the next month, that equates to a -50% loss in capital! But if instead of panicking, you purchased even more shares, then you would have made even more money when the stock recovers.
For example, assume you had $10,000 to invest and decided to split that into 2 portions of $5,000. You invest the first $5,000 when the shares are $50 a piece. Your would have purchased 100 shares. Your purchase price is now $50 per share. When the share price tanks to $25 and you activate your 2nd tranche of $5,000 to invest, you could then purchase 200 shares. So in total you would now have 300 shares and your net investment is $10,000. That means that your average purchase price is $33.33 per share. Therefore, you do not need the stock to recover to $50 to break-even on your investment. You only need it to recover to $33.33 to break-even and if it returns to $50 a share you would have made a handsome 50% return! But there is no way you are going to average down if you lack conviction.
Another way conviction gives the investor a very strong edge in regards to portfolio management is that they allow the investor to be patient while holding the stock. Investors tend to be very impatient when it comes to their returns in the stock market. They not only want a high return but they want it quickly. But more often than not, very high returns comes only with time. Refer to the stock chart of Hartalega and many other wonderful companies and you will see that the big returns are generated over time and not within a short period of time. This is especially useful when share price stays down for an extended period of time.
Take Hypebeast for example. If you made your first investment in this company in July 2018 at HKD 0.65 per share, you see the share later tanked to the HKD 0.50 range and stayed there for a good 6 months despite good reports. Many investors would have lost their patience and sold off the shares and look for a better opportunity. However, being convinced of their future, you not only purchased more shares and reducing the average costs to HKD 0.62, yet waited for the entire 6 months. By July 2019, the company released a great financial report and the share price spiked to as high as HKD 1.31 per share. That is a 111% return in 1 year alone!
Once again, this would not be possible if the investor had not been convinced regarding the company’s future.
So as you can see that conviction is key in order to invest successfully. As the saying goes, without conviction even great companies can become poor investments.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.