If I recall correctly from the Four Corners show on Australian ABC TV this week Gerry Harvey admitted to losing about $1.5 billion in wealth in the last year or so – but still has a cool billion left. This was a billion he never had within his sights or reckoning years ago so he is still laughing.
My apologies to our international readers to talk of a local identity – but what I am about to discuss is relevant for all investors all over the world. Basic principles transcend country boundaries.
Gerry Harvey lost his $1.5 billion primarily by buying his own stock – that is in his listed company Harvey Norman – HVN. To his credit Gerry Harvey spoke openly about his foolhardiness to buy more as his stock share price continued to slide.
In global investing language this is called dollar cost averaging but for some existing dominant shareholders in any company there can be other motivations for buying more of your own stock. This can be blind belief in one’s self, it can be a belief that you can prop up your company’s share price alone or with a small group of friends or it can be shear desperation to save what is left in your existing shareholding especially if it is leveraged. I am not saying that these motivations exist in every case but they are common reasons why investors pour more money into an asset declining in value.
Gerry Harvey lost $1.5B. Theoretically his wealth may have been up at $2.5billion when his share price may have been around $7 – and now it is around $2. I have not bothered to do the maths because I almost cynical about the top share price or anything around those level. As that does not represent the value of a company but rather it is a theoretical value some foolhardy investor has unwittingly (perhaps) put on that company’s share price.
I also remember the Fundie, I mentioned only a few editions ago, was telling me how he thought Macquarie’s share price would hold up because its key management had deep pockets. Well MQG is down over 30% since that conversation. You mean Macquarie executives also believe in dollar cost averaging?
Basic Principle: Don’t follow a falling share price – for whatever reason – no matter how much cash you have – as the market is going to deal with that stock in a way only markets can – and for all you know that could be in a very severe manner.
Enjoy the ride