It’s finally done. Cyprus has agreed to a bail-out deal that will see heavy losses for depositors with more than 100,000 euros in Cyprus Popular Bank and Bank of Cyprus. Financial markets around the world reacted with alarm as the stock markets in the US and Europe fell. As investors, this raises the question: ‘How should we react?’
The answer’s simple; we should keep calm and carry on investing. And no, I’m not being an ostrich by hiding my head in the sand, pretending that Cyprus never happened. To understand why, we have to go back to the root of what investing is all about.
To me, investing is the act of entrusting hard-earned capital to business owners who are forging ahead to build even stronger businesses. As we purchase shares in the stock market of publicly-listed businesses, we become part-owners of a business.
Regardless of what happens in Cyprus, companies will still conduct their business and generate profits – and that is where real shareholder returns come from. As we invest for the long run, there will always be the inevitable short-term pain. But through it all, it’s what our businesses can earn over the long run that matters.
Regular folks would not stop buying bread at Breadtalk (SGX: 5DA), stop sending their vehicles for inspection at Vicom (SGX: V01) or cease drinking instant coffee from Supergroup (SGX: S10) even as big depositors in Cyprus lose their shirts.
It is painful for Cypriots and I am not by any means downplaying the anguish they will feel. However, as investors who are looking to buy part-ownership stakes in profitable businesses, we have to look at macro-factors through the right lens.
There has been no shortage of debt-related financial disasters at the sovereign level throughout history. Does anyone remember the 1990s Russian debt default? Financial chatter at the time was about the disastrous consequences stemming from a Russian default. But a recovery was swiftly in place and the Russian-debt debacle is now but a distant memory.
How about the Asian Financial Crisis in 1997, which started in Thailand partly due to its huge foreign debt load, for something closer to home? The Straits Times Index (SGX: ^STI) fell to almost 800 points at the height of the crisis. But the benchmark index has rebounded four-fold to its current level of around 3260. The reason was because businesses operating in Singapore were still churning out profits and share prices eventually reflected the earnings power.
In the end, sound businesses around the world, and in Singapore, will continue to plod along and generate profits. And that is what investors should really focus on – finding great businesses with sustainable profits to invest in for the long term. Let others do the worrying.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.