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What We Can Learn From The Most Recent Crash In Noble Group

What we can learn from this incident


Noble Group (“Noble”) hits a snag in its share price recently with a double whammy from all the bad press it received and massive short selling. In fact, Noble’s stock price plummeted around 28% last week, mainly due to the stoppage of substantial share buybacks from the company.

Here are two important lessons that retail investors can learn from this most recent incident when it comes to investing.

1. Avoid companies with poor financials or accounting irregularities

A check on Noble’s accounting ratios from the SGX website would have waved a red flag. With net profit margins constantly under 1% for the past four years, coupled with a huge debt load, Noble was extremely vulnerable to any external shocks. Furthermore, the global slump in the demand for commodity hasn’t helped its cause favorably.

Noble Financials

To give a perspective to the average Joe, it simply means this: Your salary is decreasing annually, you can only save less than 1% of your salary monthly but yet, the mammoth home loan interest payments is constantly sucking up whatever you have left, leaving you with no savings and barely any buffers.

If you are interested to find out more about the accounting irregularities faced by Noble, you can read them here from Muddy Waters and here from another research firm – Iceberg. But, be warned, it’s a lot more technical and accounting-focused.

That being said, the best way investors can avoid attacks from short-sellers is to make sure that the fundamentals of the company are solid to begin with. This scenario is similar to what Warren Buffett has mentioned before: A stock price will eventually catch up to the value of the company and in this case, Noble’s share price has reflected the deteriorating financial position of the firm.

2. Never based your investment decision on the stock price

Never ever make assumptions solely on the “cheapness” of the stock based on its share price.

Back when it was trading at around S$0.90, the investment community seemed to be in agreement on how “cheap” Noble was for a Blue Chip1. Some acquaintances of ours saw the “opportunity” to make a quick buck by buying at that price and hoping to sell off when the price goes beyond S$1.00. During that period of time, you too might have felt the urge to jump on the bandwagon (noble’s cheap valuation) for fear that you might miss out on what appears to be an inevitable quick bounce in the price.

However, fast forward today; Noble closed last Friday at S$0.455, down almost 50% from the so-called “cheap” purchase price just a few months back. A quick glance in share forums like sharejunction also reflects the anxiety and worries endured by those still vested in Noble, with some reporting to be sitting on paper losses of S$45,000.

Read Also: 12 Dangerous Assumptions To Make Over Stock Price

On Hindsight

On hindsight, many would have preferred never to have touched Noble. The best way to avoid falling into such a pitfall is to understand the underlying reason on why you had purchased the stock in the first place. And if you can’t explain to yourself the reason, you frankly have no reason owning the stock in the first place.

If you have purchased it in view of a quick gain, setting up a cut-loss target would be imperative. On the other hand, if you have bought it thinking that it is a well-run company but temporarily clamored by headwinds, it would be wise to dollar-average down since you are confident that the stock price will one day catch up to its true value.

1Blue Chip is usually portrayed as the leaders in their industry company with a strong reputation for quality and reliability in good times and bad. As such, their stock prices are generally much more stable compared to the smaller companies.

 

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