When you overpay in haste, you regret at leisure. Time is the greatest teacher in investing, and refusing to learn in due course does not spare us. Eventually, time teaches us what we resist learning.
The “Buy at any price” approach to investing faced a tough week this results season. Companies that the market believed capable of justifying higher valuations have come up short. Two prominent blue-chip firms, once much adored and celebrated, experienced a double whammy: the steepest profit decline and margin contraction in recent history. These firms, heavily invested in, overly celebrated, and positioned as infallible, saw their reputations unravel in what has become an investment masterclass.
These companies had years of hype and became widely held, with a fivefold increase in shareholders over the past five years. Retail investors bought into these stocks under the belief that growth in sales and profits would continue unrestricted into the foreseeable future. Until just weeks before the September quarter results, both stocks traded at price-to-earnings ratios far above their historical averages. Now, headwinds have struck both companies like a blizzard, testing the elasticity of their valuations.
Although these iconic companies will likely fight their way back to better days, the interim period could prove the most challenging phase yet for investors who bought in at elevated valuations.
This brings us back to the basics: not all storied companies withstand the test of time. Even the best companies face challenging periods, and when they do, the market may collapse valuations to unforeseen levels. These phases can last, testing the conviction of investors who bought in at stretched valuations. Retail investors, in particular, may lose confidence, especially if institutional investors exit, fearing further declines. Such moves can severely impact retail investors, who find it difficult to watch significant unrealized losses in their portfolios.
When this happens with the bluest of blue-chips, it can shake their faith in equity. The coming days may prove challenging for those who adhere to a “Buy at any price” philosophy, as even blue-chip stocks may cause pain.