The trend is your friend

Because we don’t know what will happen in the future, we base our expectations for the future on the recent past and, in fact, create our own reality. When it comes to investments, especially shares, these future expectations become a self-fulfilling prophecy to the extent that we determine the price of a share by being willing to buy it at that price – which then becomes the new value of that share.

The result of this buying or selling guided by expectations is that a share can become too expensive, or too cheap. In the investment vernacular, “The trend is your friend”, meaning that once there is an established emotional direction, it will continue until it no longer does. What makes it stop, is usually that facts emerge about the specific share, such as via the publication of the financial statements. It is therefore important not to follow the trend blindly but to evaluate the share on a regular basis and try to establish what the intrinsic value of the share is without getting influenced by the hype.

We have seen some big moves in the retail sector recently. Many of our retailers have released their trading figures to end December, to much disappointment in the market. Mr Price dropped 16% on their numbers and Massmart fell by 20%. Like most local shares, retail has had a tough four years and this may continue because without economic growth, you will not see incremental increases in sales. We have to put this in perspective though: over the past ten years Mr Price is up 735% and Woolworths is still up 378% after having fallen 31% since end 2016.

So we have to ignore sudden sharp movements up or down when it comes to evaluating our investment in shares and rather determine the true underlying value of the company on a continuous basis. And if we do not know what the value of a share should be and we are lucky enough to own it while it goes up, then we should at least take some profits every now and then.

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