C’est un cas de figure assez fréquent : le cours d'une belle grosse entreprise plonge depuis plusieurs semaines et s’échange désormais avec un « rabais » de 30% par rapport à ses plus hauts. La tentation est alors grande pour un investisseur d’acquérir bon marché une société qui l’intéresse. Comme en plus cette dernière a pour habitude de rémunérer une bonne partie de ses bénéfices à ses actionnaires, le dividend yield qui s’affiche sur les sites boursiers est particulièrement alléchant. Tous les facteurs sont donc réunis pour nous pousser à acheter ce titre.
Unfortunately, most of the time, this is a bad idea. If the share price is collapsing, it is because in principle there are good reasons. Among these, let us mention a great classic: the profits made do not match expectations. In the best case, the latter were really too high (and therefore the share price too) and the market is only correcting a temporary anomaly. But if the expectations were reasonable, or, worse, if they are not met several times, there is a good chance that the company is facing a more serious problem, not only cyclical, but structural. The share price then does not only undergo a short-term correction, it enters a negative spiral from which it can take a very long time to recover. In addition, since profits are struggling, the dividend is also likely to suffer. If you thought you were making a good deal with a dividend at 5%, if it is halved or even suspended altogether, it is as if you had bought an apartment that is not only losing value, but whose residents are no longer paying you rent. In short, a big laugh.
Of course, there are always people who are smarter than others, who "know" how to buy at the right time. I bet you've heard these kinds of stories around you many times. In truth, they may have traded only once in the bottom of the market and they forgot to tell you about all the other times they got caught up like ordinary mortals in the bearish whirlwind of rotten stocks. Stock prices have an unfortunate tendency to behave in a similar way for long periods of time, sometimes down, sometimes horizontally and most of the time fortunately up. The chances of pulling off a masterstroke on a change in trend are insignificant.
While there is a risk of hurting yourself trying to catch a falling knife, it is much wiser to pick it up once it is on the ground. It may be a little damaged, the handle slightly chipped or the blade a little less sharp. However, you do not risk ending up with blood on your hands. A stock that falls heavily may end up in the graveyard, like Swissair, but it may also stabilize at a more or less low level, like UBS. The more brutal the descent into hell, the longer the stabilization period will have to be to be sure of getting out of the bad situation.
After the flood, we can thus pick up companies that have certainly been sold off and more or less pulled through, but most of the time are bloodless, far from the thousand lights under which they shone a few months or years earlier. We are entering the world of post-war battlefields, strewn with mines, but also teeming with a few illustrious survivors. A more or less long period of absence of dividends gradually gives way to a return to grace of distributions, sometimes very generous and generally solid. An income-oriented investor will easily find what he is looking for. On the other hand, even if the fundamentals have recovered and dividends are back, the stock can still take months, or even years, to take off again. Sometimes it never really recovers, limiting itself to vegetating in a more or less narrow horizontal channel, a kind of purgatory specific to stocks.
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A thorny subject that constantly arises when you want to invest! The biggest difficulty is always knowing whether a drop of 20 or 30% is just a short-term storm (and therefore an excellent buying opportunity) or the start of an even more significant drop. We are always smarter after the fact and fortunately good diversification and dollar cost averaging can limit the impact of our mistakes on the health of our portfolio.
The problem is that we don't know where the ground is. That's why fundamental analysis is always very important.
As for me, between 2002 and 2008 I had applied with some success the strategy of buying bluechips that had taken a good discount for one reason or another, until the purchase in 2008 of UBS shares already heavily discounted (at around 40) from their peak around 70… The share price inexorably fell to 10, against the backdrop of the subprime crisis; since then, UBS shares have been stagnating between 10 and 20… And yet, this bank survived thanks to the brilliant intervention of the Confederation and the Swiss National Bank. I sold at 20, after a few years, thus recording a loss of 50%, which served as a lesson to me.
Indeed. That is why we must wait for a long period of stabilization. Not weeks or months, but rather years. An improvement must have time to be felt at the level of the fundamentals without it yet being reflected in the price because the market is still cautious. The example of the banks is telling. It has been more than ten years since they picked up and the market still disdains them (it is true that they are not helped by the rates either). The ultimate example is Japan. 30 years after the bursting of the bubble, Japanese stocks remain in a kind of no man's land. There we are sure to be on the ground, even a little too much... We would indeed like it to go up and that can pose a problem for investors oriented only towards capital gains. On the other hand, as far as dividends are concerned, whether in the example of the banks, or Japan, they are very present!
The problem is that we don't know where the ground is. That's why fundamental analysis is always very important.
As for me, between 2002 and 2008 I had applied with some success the strategy of buying bluechips that had taken a good discount for one reason or another, until the purchase in 2008 of UBS shares already heavily discounted (at around 40) from their peak around 70… The share price inexorably fell to 10, against the backdrop of the subprime crisis; since then, UBS shares have been stagnating between 10 and 20… And yet, this bank survived thanks to the brilliant intervention of the Confederation and the Swiss National Bank. Finally, tired of it, I sold at 20, after a few years, thus recording a loss of 50%, which served as a lesson to me.
Generally speaking, I had taken a slap in the face in 2008, not having seen the subprime crisis and the stock market crash coming. But I had "gritted my teeth" by not selling anything, and after a few years my shares recovered and I wiped out my losses, while continuing to invest. Obviously, this recovery was only possible because my other shares fortunately did not behave like the UBS share. Diversification is important...
After 2008, I no longer bought "falling knives" without carefully analyzing the fundamentals of the stocks in question. And in the spring of 2017, I - obviously wrongly given the increase in value of the stock markets since that time - liquidated everything, because I no longer understood the markets and valuations, and the absence of inflation despite the generous "quantitative easing" policies that have practically not stopped since 2008, sensing that we had not solved the problem of 2008 by simply postponing it; I still do not understand and do not know where we are going and how this will end.
I just made exactly the same mistake with Siemens… I’m going to wait a bit and sell, hoping it goes back up! In hindsight, I tell myself that it’s not my kind of investment anyway. I don’t know what possessed me to invest in such a company. Thanks for this article which comforts me a bit 😛