Investment Discipline

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One of the most challenging aspects of investing is not what many may think. Digging through the multitude of options available to place cash can be daunting task. However, keeping your cool when things move in the wrong direction can make or break returns.

There have been a number of companies that have seen their stock price plunge 10% or more in a single day. In my opinion, large moves such as these are often due to one of the most influential forces on financial markets, emotion. Two examples that come to mind are below.

An upscale fashion retail company’s stock price fell 15% in a quarter after reporting a disappointing third quarter and lowering its expectations for the rest of the year. Its results for the quarter were not unlike some of its competitors who cited warmer than usual fall weather and less store traffic from tourists due to the stronger US dollar as headwinds. Weakness across the sector has many concerned that online competitors are taking share from traditional retailers at a faster pace, which is a longer term issue. The company has a number of efforts underway to position itself to compete better in the online space, where it is already a leader among its brick and mortar peers, and is also expanding into new geographic markets. When tempering our expectations from these investments due to competitive pressures from online retailers that may be more material than expected, we can make a case that the stock should not remain at the depressed value forever. In fact, it has regained nearly 4% of its value the week of October 5th after its decline.

An American software company saw its value drop over 20% during the summer months of June through August after lowering its multi-year profit forecast due to a change in the way it saw its online strategy paying off. Originally, it felt more of the businesses using its desktop software would switch to its cloud based model. These are larger customers, which would have driven more revenue but have been unwilling to abandon their current setup as the company has been slow to build the accounting capabilities needed by into its online product. As a result, it is seeing a larger than expected inflow of smaller businesses to its online platform, which generate fewer sales. The cut to its expectations likely caused concern that overseas competitors were stronger than expected competitors and pushed the stock off a cliff. However, we feel the company has the best reputation among the small business accounting community. This has resulted in subscriber growth from these customers that have consistently exceeded management’s targets. Combined with the attractiveness of the move to its subscription based business model, which is a whole other topic; this paints the picture potential higher value. Investors appear to have regained some confidence in its ability as shares have regained nearly all of its losses from the 20% price drop this summer.

Letting emotions take over would likely result in the sale of these companies. Instead, it is important to know what is occurring fundamentally in the business. In these cases, it has helped avoid taking such large losses.

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