Wealth

Bad News in Stock Markets: A Guide for Investors

In the ever-fluctuating world of stock markets, dealing with bad news is a crucial skill for investors. Whether you’re in the midst of a bull market or facing the challenges of a bear market, understanding how to handle negative information can make or break your investment strategy.

Recent events surrounding Guizhou Moutai and Tsingtao Brewery have highlighted the impact of bad news on stock prices. From price fluctuations to pandemic-related setbacks, these companies faced their share of challenges. But how investors react to bad news is what truly matters.

One key strategy is to discern the true impact of bad news on a company’s fundamentals. By looking beyond the immediate negativity and identifying potential investment opportunities when the core business remains strong, investors can turn bad news into a chance for growth.

Drawing inspiration from investing legend Warren Buffett’s approach, we see how his mindset can guide investors in finding hidden value during times of market turbulence. The key lies in staying rational, patient, and seizing opportunities that arise amidst the storm of bad news.

So, as you navigate the unpredictable waters of stock markets, remember that bad news doesn’t have to spell disaster. With a clear understanding of company fundamentals and a strategic mindset, investors can turn challenges into opportunities for financial growth and success.

In a bull market, “bad news” is easy to digest, but in a bear market, “bad news” is unbearable. Sudden “bad news” will cause the already weak stock price to retreat even more. As long as you stay in the market long enough, investors will inevitably encounter such situations. What should you do when “bad news” comes?

In fact, investors need to carefully distinguish whether “bad news” is true or false. Not to mention that some “bad news” itself is false. What’s more, even if it is true, “bad news” may not be suitable for some investors. , can also be turned into good things.

Historically, Buffett is best at taking advantage of “bad news” in the stock market to obtain additional income. Almost all of Berkshire’s heavy holdings were bought by Buffett at the bottom when a listed company encountered a major crisis. Such as American Express, Government Employees Insurance Company, The Washington Post Company, The Coca-Cola Company, Apple, etc.

But if the “bad news” declares that the company’s fundamentals have been damaged, no matter how low the stock price is, investors should stop losses and admit their mistakes in time. Ultimately, the impact of “bad news” comes from investors’ understanding of the company.

Just treat it like a “bonus” check was lost in the mail.

“Bad news” often brings good prices. If an excellent company encounters temporary difficulties, the capital market will often over-reflect its difficulties in an exaggerated manner, and the stock price will be driven to the floor. At this time, a good buying “window period” is often formed because the company’s fundamentals are not No changes.

In September 2008, due to the negative impact of the melamine incident, Yili shares plunged 60% in two months. The following year, Yili shares were ST listed. However, if investors buy and hold Yili shares when they are in turmoil, So far, the highest profit has been approximately 60 times.

Yili Co., Ltd. made provision for all losses in its 2008 annual report. Since then, it has adopted strict production standards and controlled multiple high-quality milk source bases. No addition of melamine has been detected, turning a bad thing into a good thing.

The way of thinking adopted by Buffett and Munger is worth learning from: If the “bad news” brings a one-time loss and does not damage the fundamentals, the overreaction of the stock market will bring enough safety margin to rational investors. Yili Shares and Express Companies fall into this category.

In November 1963, American Express discovered that the warehouse had suffered heavy losses due to commercial fraud committed by others. The warehouse belonged to a subsidiary of American Express, and the total loss was estimated to be US$150 million. To make matters worse, shortly thereafter, U.S. President John F. Kennedy was assassinated in Dallas.

Almost everyone is in panic, investors are afraid to avoid it, and American Express’s share price has been cut by more than half. American Express CEO Clark intends to compensate the warehouse’s creditors $60 million. This $60 million in compensation has even brought American Express to the edge of insolvency. It is unclear whether American Express can survive.

However, Buffett’s survey believes that the use of American Express’s traveler’s checks and credit cards will not decline. Customers still trust American Express, and the stain on Wall Street has not spread to the streets.

Buffett said: “In my opinion, that $60 million is like a dividend that was supposed to be paid to shareholders, but was accidentally lost in the mail. I mean, if the company announced that it had lost a $60 million dividend, everyone would not No sense of impending disaster.” Buffett rushed to buy as much American Express stock as he could without driving up the stock price. In April 1964, Buffett had invested 3 million yuan in this stock, which was the largest investment of his partnership.

After the melamine-tainted milk incident broke out, Yili Co., Ltd. made a provision in its 2008 annual report for a loss of 885 million yuan from inventory scrapping and a loss of 235 million yuan from inventory depreciation, resulting in a loss of 1.687 billion yuan for Yili Co., Ltd. that year. Although this one-time loss seemed very serious at the time, it still did not affect the company’s profitability in the coming year. In 2009, Yili Co., Ltd. turned a loss into a profit. The net profit attributable to the parent company that year returned to 640 million yuan. In 2010, the net profit attributable to the parent company was 780 million yuan. In 2011, the net profit attributable to the parent company was 1.8 billion yuan.

When “bad news” comes, a plunge in stock prices is likely to create a huge margin of safety for investors. At this time, stocks can be bought at low prices, which is really a good opportunity to enter the market. This is especially true when a listed company with excellent quality encounters temporary difficulties and its stock price drops. Although its stock price is falling at this time, fundamentally speaking, the company’s long-term profitability has not been affected at all. Once the market realizes this, its stock price will rise sharply, and investors can make a lot of money from it. Pen.

In Buffett’s view, if the intrinsic value of a listed company remains unchanged but only encounters temporary difficulties, investors will abandon it. This is completely childish logic.

Cancer surgery

If unhealthy parts of a company can be cut off through surgery without damaging the fundamentals of the company, the stock price will return sooner or later. This is the case with the Government Employees Insurance Company bought by Buffett.

At the beginning of 1976, the Government Employees Insurance Company announced a loss of US$126 million for the previous year. The company’s stock had hit a record of US$42 per share in 1974, but now it has plummeted to US$4.875 per share, and it is in dire straits. middle. This is the “Titanic” of the insurance industry.

This significant loss occurred because Government Employees Insurance Company mistakenly relaxed its usual practice of insuring only the lowest-risk drivers, while premiums remained as low as ever. High-risk drivers’ repeated traffic accidents left the company burdened with medical bills and Car repair costs have increased significantly.

Like American Express in the 1960s, GEICO was “a great business going through a storm.” But even in gloomy times, Buffett can foresee the sun shining after the storm. Berkshire invested $25 million for a 25% stake.

When analyzing Government Employees Insurance Company’s investments, Munger once said, “We have many friends who have spent their lives rescuing failing businesses, and they invariably use the following method – what I call the ‘cancer surgery method.’ Government The Employee Insurance Company’s main business was very good – it was still able to function even though it was buried in other chaos. Because they were so successful, they did some stupid things because they made money. He had a lot of money, so he knew everything, and he suffered heavy losses as a result.”

In fact, after Government Employees Insurance Company returned to its low-cost operating style of the past, its advantages did not change and its profitability was revived.

“In the process of analyzing public companies, some people do not come up with any insightful opinions even after weeks or months of analysis. But Benjamin Graham’s analysis method always works-after experiencing After a financial crisis, the value of listed companies often increases and they are better understood,” Buffett said.

Whenever the stock prices of excellent companies plummet, investors are more likely to find that good investment opportunities that they have missed in the past are presented to them again. Only during this period will excellent companies appear at incredibly low prices.

Buffett believes that the reason why these companies with a long history have come to this day itself shows that they have withstood the test of history. Their business and performance are relatively stable, and at most they will only encounter temporary difficulties or serious crises. As long as they remain Occupying the minds of consumers, it will one day be able to make a comeback, thereby bringing huge returns to investors.

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