4 things to remember in February’s nervous stock market! keeps showing up in conversations for a reason. The story below covers what is actually happening, where the trade-offs sit, and what a careful reader should take from it.
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We have seen the FTSE 100 hit new all-time highs this year. But we have also seen a mounting sense of unease about whether AI could be a financial timebomb for the stock market.
That helps explain some recent falls in high-quality British shares across a range of different industries, from software supplier Sage (down 38% in a year) to publisher and exhibition firm RELX (LSE: REL) (down 48% in a year).
Meanwhile, some leading US tech stocks have also been heading downwards, fast.
Nobody knows when the next stock market crash might be, or whether this might be the start of it.
But what I do know is some key things to remember during periods of stock market volatility.
Stay calm!
First and foremost, do not panic!
Easily said, but it can be harder to do when in the heat of the moment. This matters because a panicked mind can lead to costly mistakes in decision-making.
A paper loss is only a paper loss
It is also important to remember that even if a share you own plummets and shows a huge loss on your portfolio valuation, that is only a paper loss.
This does not become an actual loss unless you sell the share. Typically you have no obligation to do so (a takeover situation can be an exception).
You can only invest what you can invest
I am talking about stock market turbulence as if it is a scary thing, but actually it can be very exciting. That is because it can throw up some opportunities to buy great businesses at bargain prices.
But doing so takes money. Sometimes an investor is fully invested, meaning they have no spare cash in their portfolio to take advantage of such an opportunity.
They can resolve that by selling some existing holdings, or putting more money in.
But care is required.
Selling shares just to raise money to buy other shares can make for a choppy investment style — and more dealing costs.
Putting more money into a portfolio can make sense if it is genuinely spare. But I think it is often a mistake to do so if it requires other biting financial sacrifices.
As for borrowing to invest, I never do it myself. For small investors, I think it is a dangerous idea at best — and a potentially ruinous one at worst.
Price and value are not the same
Why has RELX crashed by almost half in 12 months? Is the business half as good as it was a year ago?
I do not think so. Last week’s full-year results showed revenue up 2% year on year, while earnings per share grew 9%.
That hardly sounds like a business in trouble to me – and it isn’t.
Sure, AI poses a threat to the profitability of the company’s information businesses, explaining the plummeting share price.
But if AI can cut backend costs without compromising customer demand, it could turn out to be positive not negative for RELX. This is a proven, profitable, large business with proprietary assets like its popular lawyers’ database LexisNexis.
A falling share price has made RELX more attractive to me as I think it is closer to an attractive valuation.
But, at 21 times earnings, the price is still more than I would consider paying.
