Investors are not always driven by short term yield because they need to account for several considerations besides short term paper gains. These considerations include potential downsides, the cost for accumulation, and the long term trajectory of companies. Such factors are usually oblivious to the majority of investors because they are often limited by the balance of their war chest for investing. Big-time investors on the other hand are always looking for future value and a good example would be companies like Tesla in 2018- early 2019 when the whole world was skeptical about the company’s ability to meet the demand and orders. At that time, if you would have loaded on such stock while it was still hemorrhaging and rived with bad news then you would understand the pain of investing large quantities of capital. In this week’s post, we will be sharing what constitutes as an underperforming company and why they are highly sought out for by big-time investors despite being trashed by others.
Potential Downsides
If you have checked out our post on downsides, you would have understood that dollar-cost averaging works especially well during a downturn. However, the caveat to the matter is that the company which you are vested in must also have multiple levels of support identified before investors dive in. The strategy which big-time investors use is basically a more liberal form of DCA because they have more capital to accumulated compared to lump-sum investors. Whereas lump sum investors will hardly have any interest in companies that are still weakened by recent events. Take a look at the zoomed out weekly chart of Singtel below.
Singapore Telecommunications Limited has been on a downtrend since the peak in early 2015. Since then, the company has been facing multiple challenges including Airtel’s intense price war, AIS disputes, rise of virtual telcos. These challenges to say the least were on top of the recent pandemic which affected revenue streams caused by reduced spending by enterprises and delaying of expansion plans. As a result, many investors are losing hope in Singtel’s ability to restore its glow as a telecom giant in the region. However, big time investors who are aware of future developments of Singtel have been loading consistently despite the downtrend. That is not say that Singtel would definitely regain its appeal from investors and funds however, big-time investors understand that with weakness comes opportunities hence it would be wise to accumulate along the way.
The Cost for Accumulation
Accumulation of stocks is not cheap. Investors who have been buying stocks on a periodic basis would testify that they are often caught between a rock and a crazy place. On one hand, the stocks that they would like to accumulate might be on a high but are still showing no signs of weakness in the near term. On the other hand, some stocks might have been on a long term downtrend, therefore even if it is getting cheaper, the fear of a continued downtrend is also frightening as well. In other words, there is never really a right time to accumulate stocks because you will either receive fewer stocks for your purchase (if the price is on a high) or experience significant amounts of paper loss (downtrend). Given a choice, long-term investors would definitely prefer accumulating when a giant is weakened rather than it rallying.
Long Term Trajectory
Only liars can guarantee a prospective investment decision because there are just too many variables to consider which can change at every juncture. That said, investment decisions, especially bigger ones, should always be based on available data. Hence, it would be unwise to assume that since there are no guarantees, therefore all investments are akin to gambling and guessing. Contrary to popular beliefs, the road to least resistance in investments is usually the correct one to make however, there is no telling how long and tormenting it would be after deciding to take on that investment decision. The validation of your decision will only come after interest from funds and retail investors return to the scene.
Closing thoughts
As investors, most of us start small but we should always prepare ourselves for increasingly challenging decisions ahead when our capital increases. This is especially difficult when the bulk of the investing community on social media and forums are usually small-time investors who are usually interested in short term gains (greed rallies) or stability (dividend investing). Just remember that as you progress from making small profits ($500 – $2000) from each trade to longer-term investments, you will have to face inevitable pains from DCA and accumulation because either way, there is no escaping temporal dips in profits or even massive paper losses in your current portfolio.
