Are You An Investor Or Disinvestor?

The Motley FoolWhat was the first thing that went through your mind when you heard that the Tokyo Nikkei 225 index fell 7% last Thursday?

The plunge in Japan’s benchmark index was precipitated by a 100-points drop in America’s Dow Jones Industrial index the previous day. What’s more, the stock market fall in Japan was swiftly followed by 2% falls in Hong Kong’s Hang Seng and Singapore’s Straits Times indices.

What kind of investor are you?

So back to my question, did you:

(A)     Think that you should have heeded the “Sell in May” advice?
(B)     Jump with joy because you could now buy more shares at a cheaper price or
(C)     What fall are you talking about?

If your answer is (B), then give yourself a well-deserved pat on the back. You are a real investor who understands the meaning of being greedy when markets are fearful and being fearful when the markets are greedy.

If you answer is (C) then please drop me a line sometime to let me know how you managed to tune out what is going on in the global economy. I wish I could do the same.

I, on the other hand, can’t. I have to keep on top what is happening in global markets, and thankfully I did. On that eventful Thursday morning, I was invited onto CNBC’s Asian Squawk to comment on the mini collapse of global stock markets.

But if your answer is (A) then I am afraid to say that you have probably not bought shares because you fully understand what their intrinsic values are. Instead you have probably bought them because you think they would just simply carry on rising…until they don’t.

Would you like another glass of punch?

But let me take you back to what caused the mini stock market collapse. It happened shortly after Ben Bernanke hinted that the Federal Reserve may, and I stress the word “may”, reduce monetary easing.

In other words, the US central bank has flagged up the possibility that it might need to take its foot off the gas and stop flooding the US economy with as much money as it has done before.

The loose monetary policy adopted by the Federal Reserve has often been likened to bringing out the punch bowl at a party. Consequently, everyone gets  very “happy” provided the punch keeps flowing. However when the punch bowl is taken away, the party can draw to a close quite quickly.

But it is important to remember that Bernanke never said he was removing the punch bowl. He said he might not put as much rum in the punch, which is not quite the same thing.

Will the party ever end?

At no point did Bernanke suggest bringing back prohibition. But even if he did, it could suggest that the US economy may be strong enough to grow without further stimulus.

Aside from the US, the markets were unsettled by a downbeat report on the Chinese economy. It suggested that China may be cooling down more sharply than expected. So, it might not meet the government’s growth target of 7.5% this year.

But let’s not forget that China is shifting from a command economy, in which the government makes all the decisions, to a consumer-led economy where its people will have a greater say in how they would like to spend their money. That’s a good thing for China and for the rest of the world too, but the transition will not happen overnight.

For me, the wobble on Thursday is a useful litmus test for anyone who calls himself or herself an investor. It will help to separate those who understand the benefits of long-term investing from those who buy shares just for the short-term thrill.

When we invest, we need to appreciate the intrinsic or underlying values of the shares that we are buying.  We need to remember that any fall in the stock market does not affect the intrinsic value of a business.

Investors versus Disinvestors

The intrinsic value of a business is derived from the value that the company can generate for its shareholders over the long term. So, a few words, from even someone as influential as Ben Bernanke, will not affect the intrinsic value of a business. He might be good but he’s not that good.

The event such as the one we witnessed last Thursday is unlikely to be a one-off. As long-term investors we will undoubtedly experience many more like it. But each event should be viewed as just another opportunity rather than an annoying threat.

However, to take advantage of those opportunities you will have to be prepared. You will need to do your homework well in advance to know when the shares of the companies you have always wanted to own have fallen below their intrinsic values.

Before I end, I’ll leave you with a thought on the subject from Warren Buffett.

He once told investors to smile whenever they see a headline that says: “Investors lose as markets fall.” He went on to tell them to edit in their own minds the headline to read “Disinvestors lose as markets fall – but investors gain.

This article first appeared in Take Stock – Singapore.

Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.