“In the short run, the market is a voting machine. In the long run, it’s a weighing machine” – Warren Buffett.
The thing about investing in real life is that sometimes your shares do well, and sometimes they do badly. Just like anything in life, you have highs and you have lows.
Wilting in the summer sun
Earlier this year I was ecstatic as so many of my shares were soaring. In particular, my bet on insurance outsourcer Quindell (LSE: QPP) was paying off, with the share triple-bagging.
Emboldened by my success with Quindell, I bought into more small-cap growth stocks such as mobile innovator Globo and internet betting company GVC.
But now I am finding that many small caps, including Quindell and Globo, have been wilting in the summer sun. It has been a sobering few months for my portfolio. I guess it’s just something you have to take on the chin.
Quindell in particular is sitting at a mere one third of its all-time high. It’s been a terrible few months, and yet, I’m not panicking. In fact, the thought of selling my holding in these shares has hardly crossed my mind. If you look at the fundamentals, I hope you will understand why.
At its current price of 167p, consensus estimates that Quindell is on a 2014 P/E ratio of 3, falling to 2 in 2015. Here is the earnings per share progression:
2011: 5.14, 2012: 14.97, 2013: 29.28, 2014: 54.55, 2015: 81.60
If the consensus is right, that’s an astonishing 16-fold increase in profits. And Quindell at the moment is on course to meet its earnings targets.
Amidst all the negativity about this company, I have not read a single article that puts together a clear and coherent argument as to why these figures are wrong. The company is astoundingly cheap, and no-one says these earnings are wrong. So why sell?
Why is this company so cheap?
The more interesting question for me is: why is this company so cheap?
Well, I have an answer, but this is a difficult concept to explain. Let’s put it this way: for most people, now is right. People generally think that now, whether you are talking about fashion, music or investing, is always right.
In other words, people believe that if something is this way now, it will always be this way. But in reality, and particularly in investing, things change very quickly.
Quindell investors need to have the faith that it won’t always be this way; they need the confidence and the unflappability to sit out the bad times patiently, knowing that, eventually, the share price will recover.