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a FUD discussion I've been toying with....this is part of a larger narrative, and it has notes and other things for further research, and it needs further editing, but...the only point in this is that it can be helpful to label the cause of a decline before deciding how to cope with it, and most declines fall into recognizable categories IMO

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COPING WITH FALLING STOCKS: DEFINING THE FUD

This leads me to stock declines and the idea that all declines follow readily identifiable templates. Because every decline is different and caused by different factors, it is easy for an investor to become confused or hesitant when dealing with FUD which arises. I KNOW this happens to me – every situation looks unique but really isn’t but everything ‘feels’ different. My goal is to better label the template involved, so I’ll have a better sense as to what to do without using too much cognizant thought (first step in coping with fear is to first recognize it; otherwise, flight vs. fight kicks in). In the end, this can be ridiculously subjective, but who cares if it penetrates the FUD – allows the coward to think even a little bit more clearly – and ultimately lets me act on a scenario which history shows is, or is not, is a buying opportunity.

There are two Types of FUD can hit Stocks: General FUD and stock specific FUD

I. Non-specific stock FUD

• General Market Decline (e.g., 10% or more in a general market index - back in 1Q 2016)

• General Drift (normal ups and downs) - may get more specific here

• Rotation from Industry - (ala movement away from growth stocks in Q4-16)

The key with a general market decline is to be aware of it on very specific terms. Declines tend to create apathy in me (no hurry when the price tomorrow is going to be lower than today) which paradoxically is the OPPOSITE of how an investor should feel. After all, uniform declines hurt stock prices simultaneously, which is theoretically a wonderful time to look, though again paradoxically most declines are rapid. To track general market declines, once a week I am now reviewing the 52 week high for the SPY and NDAQ. Most of the time this is a useless exercise, but my goal is simply to be more aware when a 10% decline occurs. While this is not a bell ringing buy signal, it does impact awareness than the market is cheaper now – by a specific number.

With general drift, the market is moving up and down in small increments which probably explains most market movement. General drift can be mostly ignored, but it is often the most logical explanation as to why some stocks are moving up and down when there is nothing newsworthy to cause the movement.

Rotation from Industry movement typically occurs with 1) changes in interest rates, 2) changes in political environment, and 3) changes in the economy where one area is expected to begin to outperform. In other words, this is caused by economic cycle analysis, typically with a readily identifiable catalyst. Given my style, this is especially relevant to growth companies that are going out of favor (ala in Q4-16 when a Trump election was expected to boost the economy and cyclical types in particular; this is especially true in any market where growth stocks are leaders) because it provides an ideal time to buy because it is a simple matter of more people selling that buying. Cramer’s show is a typical place to see this dynamic.

II. Stock Specific FUD

FUD WHICH PROVIDES BUYING OPPORTUNTIES
Stock specific FUD is not arbitrary, and the FUD that results is either an opportunity or a warning, and this is usually tied to whether the problem is short-term or not. So these are real problems, but often times the stock reacts to the issue before the issue itself is proven to be relevant. If not, or if the problem is solved, the stock will often return back to a prior perception, all things otherwise equal. Just remember that the FUD in question is NOT NEW, and indeed the overreaction caused might be entirely justifiable – or sheer panic. Panic is good – you WANT distressed selling, you like these sort of situations but only if a long-term problem is not developing.

• Threat of New Competition FUD. Just the introduction of new competition can torpedo a stock but it is critical to assess the timing impact of new competition and likely success which is the based on how entrenched current competition is in their business area. As an example, Moody’s was expected to face new competition after 2008-9 but nothing ultimately changed.

-Enghouse - today (I'll call in a while but they aren't just contact center software and surely it isn't that simple to just get up and move to another system - plus, a lot of cloud players in the space don't make money anyway, and Enghouse has still made money competing against them; course, I have ZERO business knowledge in this topic before, now, or in the future - why I normally don't concentrate anyway)

-TMX - last year when Nasdaq was coming this was the precise reason why it was falling along with energy downdraft

• Too Expensive FUD (lots of stuff – can happen at any time)

• Lynch Category Change FUD (ala Apple going to negative yoy sales comparisons but look for reverse for a reason for an upswing; when Apple started with positive yoy sales the stock re-rated)

• Didn't Meet Expectations but no change in Story FUD (Lowe's in Q3-16; one muted comp; must assess if the underlying thesis with the company has been altered)

• Single Factoid FUD (Big Lots - added PSUs and e-comm cost) already reflected in Price. That’s the key variable – does the FUD already account for the single factoid? Don’t double count a single negative factoid, especially if it isn’t consistent with the business or management.

• Legal Issue FUD (X-pel). Entirely depends on the likelihood of a legal issue result in a permanent problem but most times legal issues don’t put companies out of business

FUD WHICH PRODUCES JUSTIFIABLE PANIC

These are issues that create more declines after the current decline. The first is more serious than the 2nd and often hits multiple companies in the same industry (by definition). The second is
entirely personal, but if you are confused by an evaluation after several tries continuing to beat your head against a wall is a bad idea – say good-bye, move on, and live to fight with another stock.

• Secular Issue (Bail!) FUD (mall retail) - this is the toxic reason for a decline and will invariably be followed by more declines as these are value traps

• Confusion FUD – again, entirely subjective, but when you are unsure what is going on, it is best to get out and move to something that doesn’t create confusion; worst that can happen is the stock goes up, but a confused brain isn’t going to clear up if the confusion happens over several evaluations
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