I’ll cut straight to the chase.
On 6th December 2016 this headline flashed across my screen:
Crackdown on financial spread betting proposed by FCA
In a nutshell the Financial Conduct Authority had announced that silly little retail investors were using a product called CFD‘s without knowing what they were doing.
The FCA proposed to limit the risks that investors could take on and also commit firms who offer CFD’s to better educate their clients in the use of CFD’s.
We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses,”
Christopher Woolard, the FCA’s executive director of strategy and competition.
But what it meant for the share prices of firms who do offer CFD’s at the time of the announcement was nothing short of astounding.
Just look at the price chart of IG Group (LSE: IGG) to witness not only what happened on the day but how a news event can seriously make investors dump shares onto the market with such enthusiasm that the price becomes illogical:
What you are looking at is an approximate 40% decline in the market value of IG Group’s (LSE: IGG) stock over a period of about a week.
Of a FTSE 250 stock.
With a current dividend yield of 5.3%.
This filthy stock price decline was simply too much for me to resist and I started buying in eventually settling on a price of 535p.
Today’s price of 584p makes it too expensive for me to continue buying stock
Obviously there is more to it than just simply purchasing stock whenever an unjustifiable price decline occurs.
You need to make sure that the business behind the stock is a solid one and have a long-term time horizon for the investment.
The way I’ve set up my stock investments means that investments are held for long enough periods of time to allow not only for stick price appreciation but also for dividends to be reinvested.
It means that I am widely diversified not because I’m trying to mitigate risk but as a function of the way I buy stocks like IG Group (LSE: IGG).
The markets have had an uncanny ability of providing great opportunities to purchase stocks at a discount to their intrinsic value every month even at current market levels.
Sometimes – as in this case – I’m able to purchase the same stock for months at a time (my current purchase cycle is monthly).
Other times I’m only able to get in once before the price runs away from me but that is the nature of the market.
It reminds me of how Walter Schloss used to end up with literally hundreds of stocks in his book but for different reasons.
As for IG (LSE: IGG) the business – well it’s the UK market leader for spreadbetting and CFD’s.
It’s been in the business for over 40 years and the returns on capital employed are extremely high.
A strong balance sheet and nice dividend yield means that there is a lot going for the stock despite the headwinds of regulatory reform.
I’ll be hanging onto this one for a while.
Disclosure: at the time of writing I own stock in IG Group (LSE: IGG) as part of The Shares and Stock Markets Portfolio.