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What If a Phase One Stock Falls 50%? - Views on News from Equitymaster
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What If a Phase One Stock Falls 50%?
May 2, 2017

  • Never forget these words of wisdom
  • Market inefficiencies creating an opportunity?
  • Phase One managements vs research analysts

Dear reader,

Don't be alarmed. I'm not trying to scare you.

I doubt any of our Phase One recommendations will crash 50%.

But we all know the phrase 'hope for the best but prepare for the worst'.

Every investor hopes for the best.

But how many prepare for the worst?

It's easy to be a long-term investor when markets are rising. All you need to do is hold on to your stocks. The market's rising tide will lift them.

But what happens during a bear market?

You will be tested. Many market participants will forget about long-term investing. They will dump stocks en masse...even the good ones.

Your high conviction picks can drop 40-60% in a few months.

Phase One stocks are not as liquid as typical small-cap stocks. Just one large investor dumping his holdings can cause the stock to fall sharply.

Nothing tests an investor's conviction more than rapidly falling prices.

In normal times, investors are willing to tolerate some short-term underperformance in Phase One stocks. For example, our first recommendation, National Fittings, has been flat after an initial surge.

But we are not concerned.

We know the company is well managed and has good growth prospects. The stock will do well in the long term. The short-term underperformance does not worry us at all.

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