How Rich Do You Want To Be?

The Motley FoolHow do you feel about the stock market today compared to a fortnight ago when the Straits Times Index (SGX: ^STI) was knocking on the door of 3,500 points?

At the close of play on 21 May, when the benchmark index reached 3,455 points, Singapore shares were literally within touching distance of an all-time high. Then everything went pear-shaped.

Personally, I couldn’t be happier.

Happiness Is Buying A Good Cheap Share

Problem is, whenever I even hint that I quite like it when the market falls, people look at me as though I am one sandwich short of a picnic. Additionally, their response is generally quite predictable. They can’t understand why someone, who so avidly promotes the benefits of stock-market investing, can possibly like share price falls.

Thing is, I am a long-term investor. What’s more, I still have many more investing years ahead of me to look forward to. So, I want to buy shares when they are cheap, and not when they are expensive.

Let me give you an example.

I have now been investing for a couple of decades. Over those years, I have built a solid portfolio of shares that have not only rewarded me with capital gains but regular dividend payout too. Together they deliver what is known as a total return.

The problem, though, is this: I have to do something with those dividend cheques that keep landing in my bank account.

I need to reinvest the dividends into more shares so that I can qualify for even more dividends the next time that the companies make their payout. I also need to invest fresh money if I am to have a comfortable retirement.

So, here’s the question: Do I, as a long-term investor, wish for lower share prices or higher share prices when I reinvest my dividends and make my fresh investments?

I am sure that most of you will agree that the time to invest is when share prices are low and not when they are expensive. It just stands to reason.

So, when the market falls, it should be seen as a time of opportunity.

Don’t Worry, Keep Investing

However, not every investor sees things in exactly the same way. Some see stock market falls as a time to worry because recent events might confirm impending gloom for shares.

But falling into the Recent Event Syndrome trap is the worst thing we can do as investors. Recent Event Syndrome is what happens when people react to recent events rather than historical ones, even though historical events are more likely to prevail, eventually.

So powerful is Recent Event Syndrome that even if lengthy historical evidence suggests that a particular course of action is more likely to happen, many people are still persuaded to ignore that in favour of more recent occurrences.

Consequently, the argument that “this time it is different” can prompt many to behave in a strange way. Sometimes it can cause people to pile into shares, even though the stock market may be overvalued. At other times, it can convince people to shun the stock market even though it may be ostensibly cheap.

Recent Event Madness

That is why it is important to build your portfolio around a coherent plan. If you don’t, then it is very easy to unwittingly react to recent events.

Think back, for instance, to how you reacted to events such as the US fiscal cliff, the US debt ceiling, SARS, avian flu, interest rate rises, interest rate cuts, Quantitative Easing, the European debt crisis etc…

Were you one of the many who were afflicted by Recent Event Syndrome? Did you put your investments on hold because you bought into the idea that “this time it is different” only to find that it wasn’t?

It is not easy to ignore recent events because these events are really happening. However, as investors, we need to remind ourselves that over the long term shares rise, which is why Warren Buffett quipped that his favourite holding period is forever.

Buffett also said: “The rich invest in time, the poor invest in money“, which, in my view, is probably one of his most powerful quotes.

If you want to be rich, it is important to regularly invest in a robust portfolio of shares that will reward you over time with capital gains and dividends. The richer you want to be, the more you should invest. But if you want to remain poor, then invest in money.

This article first appeared in Take Stock – Singapore.

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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 Director David Kuo doesn’t own shares in any companies mentioned.