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Stay rational when considering a share

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It’s important that investors do not get too attached to a company – you can’t treat it like a grandchild.

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The way to do that is to fully understand it, to figure out the business model, the competitive edge, and the competence and integrity of the managerial team. If any of those fundamentals deteriorate you have to say goodbye to it.

“One rule you want to remember: the stock does not know you own it.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)

Don’t flit

Also, if the company is doing well, and you reason that it will keep doing well, then hold onto it.

By “well” I mean that the discounted value of future cash flow is more than the current market price.  You must keep up to date with your company and periodically refresh your analysis, including new discounted cash flow (or earnings) estimations.

Following this rule you might find that even though your company’s share has doubled or trebled it is still a good hold because the updated discount calculation shows much higher value that you first worked out.

Often the best shares are the ones I’ve been holding for many years.  To emphasize: you have to understand it to be able to stay with it.

Don’t be always fearful

We have had two major shocks to the economy, and therefore the stock market, in the last three years, firstly Covid and then high inflation followed by raised interest rates. These were serious things to be concerned about. And serious things similar to these will occur once or twice in the decade ahead, probably.

But you can’t let these sorts of threat paralyse you into never going into the market and buying shares. Most of the time the best advice for a long term investor is to keep on investing despite worries – most of these worries are not on the same scale as Covid or the inflation scare.

Furthermore, other investors have probably already pushed down share prices to incorporate the concerns. So keep going on share investing, and only expect big crises to come along every decade or so.

If you over-worry you’ll miss a decade’s worth of returns. Right now I’m 100% invested in UK equities despite the lingering concerns about inflation and recession. I regard these concerns as being of a normal order and not big.

I’m reassured that while inflation seems high right now it won’t be come Christmas (the price of gas, for example, was €343 per MwH in August last year; it is €40 now. Things like this will push headline inflation below core inflation soon, which will have implications for people’s mood, growth and interest rates)

Peter Lynch: “If you own stocks there’s always something to worry about. You can’t get away from it. What happens in the 1950s, people were worried about the only reason we got out of the Depression was World War II. We got another recession in the early 1950s and we said we’re going to go right back into a depression. People were worried about a depression in the 1950s, and they were worried about nuclear war.” (Peter Lynch 8 October 1994 Lecture to the National Press Club). The 1950s were a great time for investing.

Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)

Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide.  The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF.

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