What a difference a week can make.
Last Tuesday the ASX was sitting at a fresh all-time high, having rallied over 20% since the start of the year. But in the past two days, the market has lost close to 5%, suffering some of the biggest one day falls in recent history.
Moreover, the index average hides some truly epic falls — particularly in the tech sector.
At the time of writing, market darling Promedicus (ASX:PME) is down 18%. Wisetech (ASX:WTC) and Xero (ASX:XRO) are around 9% lower, while Appen (ASX:APX) and Afterpay (ASX:APT) are down about 7%. And there are plenty more examples.
It’s brutal stuff.
Still, the thing to note here is that these falls are being driven by external events that are entirely unrelated to these businesses themselves. Sure, they all operate in the real world, and trade tensions and their feared economic ramifications will be broadly felt, but the long term prospects of these companies don’t appear to have changed.
Moreover, well before these latest falls, plenty of investors were questioning the value of stocks in this sector. Sure, the quality of many seem incontrovertible, but did they ever deserve to trade on such unusually lofty sales multiples? That is, although the timing and causes for the sudden change in sentiment were always going to be impossible to predict, the fact that we’re seeing a reversion to ‘fair’ value should not be overly surprising. The pendulum of market pricing has always been thus.
The fact is that buyers should welcome these falls.
Though it’s easy to forget, you can still do very poorly in high quality, fast growing companies if you pay too lofty a price. Promedicus today is EXACTLY the same company it was last week, and it’s prospects haven’t changed one iota. The only thing that has changed is the price, and in a manner that greatly improves future return prospects.
That’s not to say that investors should be out buying today. It’s entirely possible for shares in these former market darlings to still be overpriced.
Shares should not be considered cheap simply because they have fallen from previous market highs, but because they compare favourably to an objective appraisal of fair value.
That’s why, at Strawman, we enable investors to share their valuations for each stock and then contrast that with the current price. As humans, we’re always susceptible to anchoring on price, but we want our members to anchor on a price that matters.
Case in point: despite the ~26% fall in Promedicus over recent days, shares still sit above the community’s estimate of consensus value. The situation is even more pronounced with Wisetech.
So, keep your cool. Times like this are scary, but they also represent great opportunity.
Just ensure you focus on the underlying business, and don’t give in to the madness of short term market movements — even significant ones.
Identify the businesses you’d like to own, and determine a price that is sensible. Then have the patience, discipline and fortitude to act appropriately. It’s (far) easier said than done but that, dear reader, is the secret to investing well in the sharemarket.
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