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What To Do When The Stock Market Falls

What to doOn 24th June 2013, almost all Asian markets were deeply in the red. Singapore’s bellwether indicator, the Straits Times Index (SGX: ^STI) shed 1.6%; Hang Seng Index dropped further at 2.2%, and the worst off was the Shanghai Stock Exchange Composite Index, which plunged 5.3%. With markets on a downward decline since the end of May, what are investors to do now?

Benjamin Graham once quipped that, “In the short term, the stock market behaves like a voting machine, but in the long run, it is a weighing machine.” By investing in companies that are undervalued and fundamentally strong, it doesn’t really matter what the market is doing during the short-term. In the long run, the true value of the company will be reached, provided it is fundamentally sound.

If you are currently vested in the stock market, falling prices also presents an opportunity for you to buy businesses at a cheaper price. For example, a company is selling at $2 and has been dropping for the past few weeks. You have valued the share at $4. This is a 100% discount. Doesn’t it make sense to buy more of the business, provided the fundamentals are still intact? On the other hand, someone who does not know the value of the company is going to sell at $3 out to fear. He will be cashing out at $3 even though the company’s value is at $4.

However, for you to buy more of the company at $2, you have to be convinced and believe in yourself and in the company you have researched into. Conviction is paramount as this allows you to buy more of the company during a crash, without emotions coming into the fray. Warren Buffett sums it up well. He said, “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.” How’s that for a quote on conviction?

Foolish Bottom Line

During market corrections or crashes, investors who grab the opportunity emerge victorious at the end of it. If you had bought strong blue-chip companies like Singapore Exchange Limited (SGX: S68), ComfortDelGro Corporation Limited (SGX: C52) or SIA Engineering Company Limited (SGX: S59) during the crisis in 2008/2009, you would have done quite well. These companies have paid good dividends over the years as well. Even while holding it through a crash, you would have money coming into your coffers.

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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 Sudhan P doesn’t own shares in any companies mentioned.