Editor’s note: This article was first published in October 2014. Codere “currently” trading at 0.43 euros with a high risk of being delisted, and the claim that almost every IBEX 35 and continuous-market stock had risen since 2012, describe the situation then. The company’s later history is not covered.
I remember that at the end of the summer of 2012 I was sitting on a café terrace having a coffee, and at the next table there were three young men with their girlfriends or wives. I know it’s rude to listen in on other people’s conversations, but they were talking about investing in the stock market, so for me it’s inevitable that “the antennae” go up.
These young men (one of them not so young) were talking about how stupid investors in general were and why they lost money on the stock market. In fact, you could tell they had read and studied quite a lot about it, because nothing they said was wrong.
Specifically, they were talking about Codere, a company that at the time had begun a spectacular free fall, and things have only got considerably worse since then. No wonder, because the company is fighting for its survival.
I remember that the “smartest” of those young men had taken the opportunity to buy Codere shares in the second consecutive week of gains for the stock, around 4 euros, claiming that this is how you make money: “Most people have no idea about the stock market. You have to buy when everyone is selling and the share starts to recover again. That’s how you make money on the stock market,” said this very self-assured young man, adding that if the stock kept falling, he would buy more at a lower price.
“Codere is a solid company, but the crisis is hurting it, and as Spain comes out of the crisis, it will recover to its pre-crisis levels,” the young man went on, as he gave master classes to his two friends.
When I finished my coffee, before leaving I stopped by their table, simply to warn him about the danger of Codere, because I had recently had its accounts in my hands (rising debt, a shrinking business, plus bankruptcy rumours), and to give him my humble advice: there were many companies that were far more interesting than Codere, and much safer, and with much less risk than Codere carried he could get returns of up to three digits.
See also: Success in business depends on your kind of optimism
To my surprise, that young man decided to give me free stock market lessons, with a rather arrogant attitude.
First he asked me whether I had ever invested in the stock market, to which I replied “once or twice”. And he began with the first lesson:
“You have to take the chance to buy shares when they’re in trouble. Do you know who said that?” he asked me.
– Well, no. I don’t know who said that – I replied.
– Warren Buffett. I’d say that man knows a thing or two about the stock market.
After explaining several stock market concepts taken from “Buffettology”, he told me he’d catch up with me later, and that if he saw me he’d buy me a coffee to celebrate his gains.
Then it became clear to me. I was about to get into an argument with a financial genius, so I followed one of my premises.
And since I’m not fond of exercise bikes, I decided to say goodbye, but not before asking him: “And wouldn’t this Warren Buffett have been talking about companies that are ill but not in danger of ending up in the graveyard?”
But the young man explained to me again that you have to analyse a company’s track record, and that Codere in particular was a leader in its sector with many years in the business, and that investors were idiots for selling their shares instead of buying now that they were cheap.
As I walked away, I could hear him tell his friends: “That’s what I mean. Everyone thinks they know about the stock market, but they haven’t got a clue.”
And indeed, all the concepts you have learned won’t help you if your view of the context in which you apply them fails you. Codere currently trades at 0.43 euros and is a company at high risk of being delisted, while practically every company on both the IBEX 35 and the continuous market (Spain’s main electronic trading platform) has gained two or three digits in value since 2012, penny stocks included.
The lesson from this anecdote
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Is it a good idea to buy shares when they are falling? Is it good to average down? Is it really advisable to ignore market noise?
There are probably no good or bad pieces of advice. It depends on when and where you apply them. In stock market investing you can buy junk and make more money than by buying a solid company. It depends on the moment you invest.
Ignoring market noise is one thing; ignoring negative information about a company and the rumour mill is quite another. As we have said on other occasions, stock market rumours rarely fail to do damage in the short term, and rarely turn out to be untrue in the long term.
You have to tell a company in trouble apart from a troubled company. They sound the same, but they are not.
As for buying shares while they are falling, which according to Warren Buffett is like trying to catch a falling knife, you shouldn’t take that literally either, because sometimes, if we want to follow a DCA (dollar-cost averaging) strategy…
Sometimes it does pay off to buy while shares are falling and keep part of the money aside to invest if the fall continues. You will rarely buy right at the bottom.
As for averaging down, you need to be very clear about your strategy. If we are sure we are buying a genuinely solid company, then clearly every drop in the share price is an excellent opportunity to make more money.
And of course the most profitable investments are made by buying when everyone is selling, but… we should also ask ourselves why they are selling.
And last but not least for investors:
If you go through life as a know-it-all and don’t listen to others, you run the risk of ending up as a fool who misses the chance to learn. And reading Warren Buffett doesn’t make you Warren Buffett.
Further reading
- The myth of getting rich on the stock market and retiring young and wealthy
- How to make money in a bear market: tips to keep in mind
- 8 books Warren Buffett thinks everyone should read
Featured image: Zarateman, CC0 1.0, via Wikimedia Commons.
