The stock market has been very choppy lately.

Stocks fall, stocks rise. Some companies have lost a lot of market value and others have regained it.

Sometimes there is a logical reason for the plunge, and other times it’s not entirely clear why a business plummets.

In this blog post, I will look at the four typical reasons why shares take a nosedive:

1. Company-specific News

Sometimes shares in a company fall because something specific happens to that particular company.

Here are some examples:

  • Maybe a bad management decision was revealed.
  • Or the need for a new CEO. The stock market gets nervous about any uncertainty.
  • Maybe there is food poisoning at a restaurant (e.g. Chipotle around 2017).
  • Or doubt about whether the next launch will flop or fly (hello Apple)
  • It could be sharp and specific criticism, like when Starbucks was accused of racially profiling costumers after calling the police on two Black men who hadn’t purchased anything as they were waiting for a friend (in 2018).
  • Or it could be criticism of a chain when it boycotts and withdraws from the Russian market after the invasion of Ukraine (several companies recently).

The company-specific declines occur in both the bear market and the bull market.

If you want to look for value investments in times when the market is generally highly priced, you can look for companies that are hit by specific bad news that applies only to them. They are often quite obvious in the “pink” pages of the news.

However, it’s important that you evaluate how real the “threat” is.

From time to time, the market overreacts to something that isn’t really that serious. This gives us opportunities as investors.

Here’s the magic question: is it something that will permanently damage their business? Or can they fix it again?

Of course, you should stay away if the business is permanently affected.

2. Sector-specific News

This is when investors get nervous about an entire industry or group of stocks because something specific has happened to a company in the industry or a threat has arisen for the entire industry.

Examples of this can be:

  • There’s a major oil spill, and all oil stocks fall.
  • The whole airline industry plunging after COVID-19 because flying was halted.
  • Maybe there is uncertainty about what type of energy a new US government will support in an election, and shares in a particular energy sector will fall.

Just like when the shares of a specific company fall because of an event, you must look at what is going on and evaluate it.

Is it permanent damage that will cut the revenue of the business?

Is the fear real or exaggerated?

3. Rotation

There are trends in investing.

Sometimes institutional investors “rotate” out of a certain group of stocks, just because the market sentiment tells them too. Here are some examples:

  • This could be a rotation out of growth stocks where investors collectively start selling. It has a contagious effect. They sell because they fear others are selling.
  • Do you remember FANG shares in 2018? Suddenly everyone wanted to get rid of Facebook, Apple, Netflix, and Google. Apple came all the way down to the owner earnings price (read about that in my e-book here).
  • Or do you remember how cannabis stocks came into fashion and then were out of fashion?

The difference between sector-specific and rotation is that rotation is not necessarily a sector (you can’t call FANG a sector), and there is not necessarily any specific news.

It happens a bit like weather changes. The wind shifts direction.

It is totally impossible to predict how and when the wind will change.

4. General Market Fear and Sell-Off

Occasionally, almost the entire market falls because it becomes gripped by fear.

We saw this during the financial crisis, at the beginning of the pandemic, and at the beginning of Russia’s invasion of Ukraine.

These kinds of situations are the value investor’s favorite… although the circumstances may be terribly unfortunate (no one wants a pandemic or a war, but opportunities arise in the wake of them).

The important thing here is to ensure that you buy really “wonderful” companies that have growth in both revenues and profits, good management, and competitive advantages that protect them from rivals.

It is also – as always – important to make sure that you find a good balance between the price of the share and value ​​in the company.

Sometimes private investors think something is “cheap” just because the stock fell, but this is not always the case. It may fall from a very high starting point.

In these times, we need to keep in mind that we are still in a market with bubble prices.

When Russia invaded Ukraine, Shiller’s P/E ratio fell from about 40 to about 36. The normal level should be around 16.

In 1929, Shiller’s PE was at 30. In other words, stocks are still much more expensive relative to their earnings than before stocks fell in 1929.

After 1929, it took 29 years for the Dow Jones index to rise to the same level.

If you want to avoid having to wait 29 years for you money to be worth the same as today, value investing is the way forward.

You have to invest in business that you believe will be bigger in 10 years, and you have to do it when there is a reasonable relationship between what the company is worth and what the shares cost on the stock market. 

If you want to learn about finding wonderful companies and figure out the value inside a company, you can download my investment book Free Yourself here.