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The value investing guide to keeping calm and carrying on

When markets turn against them, value investors can fall bac..

When markets turn against them, value investors can fall back on a set of disciplines that should assist a calmer discussion of the situation and a cooler analysis of what to do – and not to do – next

Calmness, composure and clarity of thought are qualities all too often in short supply when markets come under pressure.

This fact of investment life is one we have once more found ourselves contemplating in the wake of airline pilot Tammy Jo Shults safely landing a plane carrying nearly 150 people after it was struck by not one but two potentially catastrophic emergencies.

Shults displayed those qualities in abundance on 17 April when, en route from New York to Dallas, Southwest Airlines Flight 1380 suffered an engine failure and then, immediately afterwards, an uncontrolled decompression of the cabin when debris from the engine smashed a window.

Sadly, one passenger died and several others were injured but Shults – a former US Navy pilot – was able to land the plane intact.

Every bit as remarkable as her skill in achieving that feat was the cool demeanour Shults displayed while doing so – graphically illustrated by the recordings and transcripts of the conversations she was having with various air traffic controllers at the time.

She is extraordinarily composed as she is laying out the details of the emergency and discussing the best course of action and the most appropriate airport at which to try and land.

She is aware people have been hurt – though not to what extent – and yet there is nothing in her tone to suggest crisis or that the situation could end very badly indeed.

Conversely, she is often the one taking the lead and, as this report of the incident notes, on a number of occasions she even ends her communications with air traffic control “using a standard and courteous signoff – Good day.”

Pressure in the markets

Now, clearly we need to be careful not to go too far with any parallels we draw between this episode and the distinctly non-life-threatening world of investment but, as we suggested at the start, when markets come under pressure, investors tend to react badly.

Rather than doing their best calmly to assess the situation before taking a reasoned course of action, they make panicked and, at heart, emotional decisions.

Of course, calmly assessing the situation when a share you own has fallen 20% in a morning is easier said than done – but the point is, it can be done.

Experience helps although, in previous jobs, we have worked with very experienced investors who have still managed to lose the plot when a share price has dived – holding meeting after meeting to try and understand what went wrong, what piece of information they missed …

More important then, we would argue, is having a system in place so that, when things go against you, there is no overreaction.

Have a system in place

In our recent series on different investment edges, we outlined the broad stages of our own investment process including, in Analytical edge, the checklist of questions we ask to ensure we maintain our discipline with every single company we analyse.

For better or for worse – and, if done properly, history suggests over time it tends to be the former – large share price falls are part and parcel of being a value investor.

After all, it can take time for the wider market to catch up with our assessment that a business is actually undervalued. And while we strive not to panic when the market turns against us, nor do we ignore what is happening.

However, our process and checklist serve to enable a calmer discussion of the situation and a cooler analysis of why the share price fall may have occurred.

And, in such an environment, we give ourselves a better chance of reaching more objective and better decisions – which, rather than rushing to sell up, may well be to do nothing and wait for further information or even to buy more of the stock.

  • Juan Torres Rodriguez is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.

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