The question everybody is asking me these days is how low MTN can go, and whether it isn’t too late to sell. The honest answer: I have no idea how low and, personally, I sold a while ago at around R175 when the news of the Nigeria fine first broke.
But this brings about an important lesson for long-term investors: Does price matter when the time comes to sell a long-term investment?
As investors we look at tons of data when considering whether or not to buy a share before finally making a decision to actually buy or walk away. Should the decision be to buy, the focus then tends to shift more toward the price side of things.
Now sure, price is important as it informs one’s valuation. A great company may be expensive, so, while it’s a great company the valuation doesn’t make sense and one decides not to buy, but wait for a better valuation instead.
The problem is that after buying, one far too often neglects the long-term fundamentals, focusing instead on the short-term share price and profit or loss.
This is totally wrong. Sure, share price is important as it derives profits (not forgetting dividends). But share prices are wild, volatile things that most often do not accurately reflect the company fundamentals in the shorter term. Rather, they reflect the mood of the market.
Investors need to remember two very important things once they own a stock. Firstly, it is a long-term investment that will ideally make profits over decades.
In other words, the short-term, day-to-day – or even year-to-year – price moves aren’t that important. Rather, the question should be whether the stock can deliver superior returns over coming decades.
The decision to sell is exclusively about fundamentals, or in the case of MTN, the company’s corporate culture, or – to be more precise – the absolute lack of it. One has to focus on the potential long-term profit growth, as this will drive the price in the long term.
Again, staying with MTN, when the news first broke and the price collapsed many commented that they couldn’t sell because it would mean locking in a loss on the investment.
For me, the reasons for selling then were based on management and, ultimately, the potential returns over time. If there is an issue with a company’s corporate culture, it will surface in many other areas (as we’re seeing now with the rumours coming out of Cameroon) and profits will suffer.
In short, it is not about the price today (and any loss or profit), it is about the future of the company and the future profits that will drive the future share price.
If the fundamentals have changed and the future looks less bright, then selling – regardless of the profit or loss – is the right thing to do.
The process I like to follow is to ask myself if I would still be prepared to buy a stock I own today if the price was right. If the answer is maybe or no, then surely I should be selling regardless of how much I have made or lost?
Forget today’s share price – long-term investing is just that. It’s about the long term and investors need to worry about that rather than today’s price.
Long-term investing is about the long-term fundamentals of a company – nothing else matters. Rather take that loss and move on and put the money into an awesome stock that will produce great returns over time.
You never want to find yourself holding a company only because selling would have resulted in a loss. If there are good fundamental reasons to sell, you must sell regardless.
This article originally appeared in the 4 February 2016 edition of finweek. Buy and download the magazine here.