Outline:

  • News cycles exacerbate short term movements;
  • Think like a private company owner: have the fundamentals changed?

Share markets are great at creating noise. Sometimes it's music to the ears, sometimes it’s loud and annoying, and sometimes it’s lip syncing when nothing is there!

What the market tells us can be useful and other times it’s not.

The difficulty comes in separating useful information versus noise and what is lip synched.

Tuning out

Share price movements can convey useful information but some of the time the movements are extreme.

The news cycle exacerbates short term movements. Thinking like a private owner of the company helps.

If we owned a business and it was private, how would the noise/news affect how we think about the future value of the business?

Should we care? Will the news still impact the business five years in the future? Are they general concerns? Is it even specific to the company? If it has an impact, is it an overreaction or even an underreaction?

Most of the time the answer is no, it's just short term noise.

The day the music died

What sort of information does the news convey?

Most of the time it's macro related and what could happen.

We can use this noise and volatility to our advantage. Current macro concerns will likely not matter in five years time. It’s difficult, but focusing on the fundamentals of the business rather than the share price can help separate what is important and what is noise.

Dancing to our own beat

A company’s fundamentals are detailed below.

If this was a 100% privately owned business with the metrics below you’d be pretty happy. Yet the share price of the company moved down significantly while the fundamentals remained solid.

But, the share price of this company fell 64% in a year - peaking at $42.68 and bottoming at $9.12.

A dramatic selloff, even though nothing in the business changed.

What company is it?

Netflix.

Netflix and chill, a current darling of the market.

Shareholders definitely weren’t chilling in 2011, when investors were concerned about the company splitting off its DVD mail service and streaming business into two separate services.

How times have changed; the DVD business is no longer important and streaming is the future of TV viewing.

There was a specific reason to be concerned but as an owner and looking at the fundamentals (revenue growth) of the business it would have been worrying but the share price fall was more dramatic than the financials would imply.

Turn down for what.

The noise was a lot louder than it should have been, Netflix was treated as if it was going out of business.

If you owned Netflix it was a horrible experience but looking at the underlying revenue growth rates and strategic reasons for streaming it would look more like an opportunity rather than something to panic about.

If dramatic share falls can happen to Netflix, we should expect noise around others as well.

Even the FANGs can be tone-deaf.

The hardest thing about investing is sticking with investments when share prices are volatile. As with Netflix above, even great companies fall dramatically.

Case in point are the rest of the FANGS (Facebook, Amazon, Netflix and Google), they have all experienced noise created by dramatic share falls.

Don’t get me wrong, we worry when share prices fall but looking at the actual fundamentals can help in trying to manage the emotions around large share price falls so that you have a higher chance of staying invested.

It's all about keeping calm when everyone else isn't.

Which company?

Another good looking balance sheet:

This one is Facebook.

Profits looked solid but again the share price was all over the place as investors fretted about users shifting to mobile.

The share price peaked at $38.23, bottoming at $17.73 down 30% in its first year as a listed company.

Again there was a specific reason to be concerned but the noise implied in the share price was dramatic, mobile advertising is now a strength of the company.

A rollercoaster ride. 

Which company?

A tough time...

It's Amazon.

The noise was depressing in this one, with the share price peaking at $89.38, bottoming at $13.88, down 84% in one year.

It would have been tough to hold but the noise was mostly macro-related and sales were still solid.

Which company?

Lucky last is Google, with its share price peaking at $343.00 and bottoming at $128.85 during 2008.

Down 55% in one year on GFC concerns and a slowing in the economy.

Google’s growth did slow but so did every other company, again the noise was macro-related rather than anything specific to the company.

The share price siren song.

Share prices can move a lot more than makes sense.

The share market can overreact, volatility can be too loud and noisy for the actual impact. Is it general or specific news? Is the news material enough to change how the company will operate in the long term? If we can filter the noise to what's important and adjust to overreactions the noise can be an advantage.

It’s not easy, the Facebook and Netflix concerns were fair at the time as investors worried about longer term impacts.

The noise of the declining share price suggested they would not be successful but their fundamentals were still strong.

The concerns were also large opportunities if executed well, mobile for Facebook and streaming for Netflix have redefined their businesses. Amazon and Google were dragged down by general growth concerns rather than specific news, thinking like a private owner would have helped.

But the lesson is to be prepared for noise and overreactions in share prices, it happens to the best of them.

The next hit? BAT.

The FANG shares have performed strongly year to date, whereas BAT shares haven't.

We are seeing opportunities in China where the financials and competitive positioning are mostly going up but the share prices are falling.

They are the Chinese FANG equivalent known as BAT or Baidu, Alibaba and Tencent. The share price of all three are down double digits so far this year mostly due to China slowdown and trade tariff concerns.

The financials here look solid.

Which company?

This one is Baidu, China’s largest search engine, equivalent to Google.

Its financials are fine but the share price is down 21% year to date, peaking at $284.07 with a low of $191.88 a 32% decline.

Investors are concerned with Google potentially re-entering the Chinese market but we believe the market is being overly negative, Baidu has over 80% search market share.

Baidu's selloff.

Next BAT?

Still growing strongly. 

This is Alibaba.

Sales are growing over 60% at an RMB multi-billion dollar rate.

Yet the shares are down 22% year to date due to trade war concerns and worries over Jack Ma, the founder, stepping down as Chairman.

The shares peaked at $210.86 with a low of $138.29 a decline of 34% from its highs. There are no competitive concerns, just concerns over slowing China growth.

The final BAT is Tencent.

Looks like sales are slowing...

Sales are slowing but we believe this is temporary due to regulatory changes in China impacting the local gaming market.

Tencent shares are down 32.5% year to date, peaking at $474.60 and a low of $267 a decline of 43%. We believe their competitive advantage as the largest social platform, gaming and second largest payment platform are intact.

Tencent selloff.

Share market background noise.

The noise created in the share market can be overwhelming.

The next time a share price moves on news think about the longer term impact. How would it affect your thinking as a private company owner?

In public markets, the noise created can be overwhelming but focusing on the company’s fundamentals and a longer term view helps makes the noise and journey a bit more bearable.

Note: Financial data and charts have been sourced from S&P Capital IQ.

BAT charts are YTD to 19/10/28.

Past performance shown for illustrative purposes only, and is not a reliable indicator of future performance.