Why A Volatile Market Isn’t That Scary After All

Tell anyone on the street that the stock market is volatile and full of incomprehensible wild swings, and you are likely get a nice crowd of people agreeing with you.

Now tell anyone on the street that the volatile market isn’t as scary as people might think, and you’ll probably end up as the lone ranger trumpeting that opinion.

Thing is, the stock market is volatile.

I looked back at daily historical data for the Straits Times Index (SGX: ^STI) from Yahoo! Finance going back to the start of 1988. I found that – not surprisingly – the stock market has indeed experienced some wild swings.

For each full year (with the exception of 2013, where data only exists up to 21 July), I looked at the difference between each year’s peak and trough and the date of occurrence.

For the years where a peak occurred before a bottom, it would mean that the index had experienced a decline and the chart below shows the percentages of such declines.

There were 25 full-years since the start of 1988, and there has been 11 years where the index has experienced a peak-to-trough-drop of more than 15%. There were even two years (2008 and 1998) where the index dropped by more than half from its highest point in that year.

That’s rough isn’t it?

peaktotrough declines

Thing is, the steep tumbles and tough times have not stopped the STI from rising by 285% since the start of 1988 to 21 July 2013. Nor has it stopped companies such as Jardine Strategic Holdings (SGX: J37), Dairy Farm International Holdings (SGX: D01), and Super Group (SGX: S10) from delivering returns in excess of 1000% since the start of 2003.

The stock market falls and it also rises – it is part-and-parcel of what the market is. In the short-term, stock prices can take on a life of their own. But over the long run, it’s the performance of the business that matters.

Benjamin Graham, the father of value investing, once wrote in his book, The Intelligent Investor, that in the short-term, the market is a voting machine, but in the long-term, it’s a weighing machine.

The volatility we see daily is a consequence of the voting machine, where the popularity of the market and of individual stocks might change at a whim. But as time passes, the true strength of the underlying business should shine through and that is when the weighing machine takes over.

Yes. The market is volatile. But it need not be scary if investors have the right focus on what really matters – the performance of the underlying business.

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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 owns shares in Super Group.