Ouch

Not a good day today:
RBS down 9%
ZRX down 8%
TW down 19%
GNK down 4.%
QDG down 5.5%

Overall I'm down 6% on the day, and 20% in total. Not pretty.

It's very depressing to see such a sea of red, and I can't help wishing that the prices would go back up to near where I bought. But that's not rational - I'm going to be a net buyer of shares for the next several years - I want them to be cheap. It's obviously unfortunate that I bought shares a few months ago when I could be buying now and getting (a lot) more for my money, but I don't pretend to be able to time the market.

Are there any genuine reasons to be concerned?

• Does the market know something I don't? I'm pretty sure insider trading does go on, so this could indicate that something is happening that I'm simply unaware of. If I was going to believe this, then I'd have to give up investing altogether, on the basis that I could never beat the market. I'm not ready to do that just yet.
• Have I miscalculated and bought at too high a price? True as this might be (and I'm not convinced it is), waiting for the share price to tank before making such a judgement is clearly the wrong way to approach things.
• Will the share price affect the prospects for the company in question? This is the key question, and for some companies the answer is clearly "yes". Let's examine that in more detail.

How can a depressed share price adversely affect a company's prospects?

To take a far from random example: Taylor Wimpey (Barratt would be an even better choice but I know more about TW). TW's balance sheet is essentially:

£0.82bn intangibles

£6bn inventory

£0.85bn receivables, cash, tax and other assets

Assets = £7.67bn. Net tangible assets = £6.85bn.

£2.08bn payables (inc tax)

£1.55bn loans

£0.33bn retirement obligations and various other miscellaneous liabilities

Liabilities = £3.96bn.

So at the moment TW has net assets of £3.71bn, and net tangible assets of £2.89bn.

TW's inventory is split £3.88bn land and £2.02bn development costs, with the rest fairly miscellaneous stuff that I don't understand.

A typical house's price at the moment is made up:

25% land

15% gross margin

60% construction costs

So that £2bn development costs represents about £3.3bn worth of houses. About £700m of the land will be part of them.

Let's assume house prices fall 20%. What can TW get for its inventory? £2.64bn. Its other land might be worth only £640m (an 80% fall). That would suggest TW's true inventory value might be just £3.28bn, for net tangible assets of £4.13bn. That leaves TW only just solvent, and with gearing close to infinite.

Assuming they successfully reduce both assets and liabilities somewhat, they could end up with tangible assets of £2.5bn and liabilities of £2.25bn. Net debt of £1.2bn, but net assets of only £250m. To get gearing back under 80% they would need a cash injection of about £600m.

TW's market cap at the end of today's trading? £554m. Tricky to raise more capital than the market says you're worth (but not impossible). If TW was valued at £2bn it would be a different story. If TW was valued at £5bn it would be dead easy. A lesson to be learnt there? TW was valued at about £5bn less than a year ago. How quickly things change.