Some things just never change. When investors get greedy stock markets have a tendency of getting ahead of themselves. But when investors get scared, stock markets take an early bath. Over the long term, though, the value of a company is driven not by emotions – as some might like to believe – but instead by fundamentals. If a company does well, its stock should eventually follow. If it doesn’t do well, it deserves to get hammered. If you can keep in mind these simple ideas when you invest, then you shouldn’t have too much to…
Some things just never change.
When investors get greedy stock markets have a tendency of getting ahead of themselves. But when investors get scared, stock markets take an early bath.
Over the long term, though, the value of a company is driven not by emotions – as some might like to believe – but instead by fundamentals. If a company does well, its stock should eventually follow. If it doesn’t do well, it deserves to get hammered.
If you can keep in mind these simple ideas when you invest, then you shouldn’t have too much to worry about when you buy shares.
Just the other day, as I was throwing out some old newspapers, a headline in one of the broadsheets caught my eye. It stopped me in my tracks. The banner at the top of the article read: “S&P 500 suffers worst week since June 2012”.
It seems that the US benchmark fell for a second day on 1 August 2014, which led to the biggest weekly drop in US shares in two years. The fall was attributed to debt problems in Argentina and banking troubles in Portugal.
The author of the article even managed to find a few eager I-told-you-so investment professionals to put some meat onto the story. One expert pointed out that “geopolitical things” that didn’t matter a few weeks ago had started to serve as “catalysts to sell”.
The money-manager went on to say that “investors are getting more risk-averse”.
Bear in mind that the article was written some three weeks ago, when the S&P 500 index closed at 1,925 points.
Now fast forward to 22 August, when the same index, was knocking on the doors of 2,000 points. That is a rise of over 3% in the first three weeks of August.
Peter Lynch was right when he said: “There is always something to worry about”.
If we look around us, there will be things aplenty that could give us sleepless nights. But these disturbing events have a habit of fading into distant memory.
It was only last week that I came across another headline. It could not have been more different to the one that appeared only a few weeks earlier. This time the headline read: “Asian stocks higher after S&P 500 record close”.
I don’t know about you but I don’t think any of us can invest properly if we are constantly flitting from one extreme opinion to another. One moment the world looks like a bed of rose and the next it could resemble a bed of nails.
Lynch was also absolutely spot on when he said: “The key to making money from stocks is not to get scared out of them”.
Over the coming few weeks and months, stock markets are likely to be jostled by concerns over the timing of an interest rate rise in the US. Add into the mix tensions in the Middle East, a possible slowdown in China’s economy and the Ebola outbreak and you have a potent cocktail of bad news that could scare us witless.
Don’t get me wrong. I am not, for one minute suggesting that we should sit around a camp fire and hold hands whilst singing a couple of verses of Kumbaya.
Economic worries could quite easily unsettle markets. But if you are prepared, it can’t hurt you. It could even benefit you.
Stock market declines can be good opportunities to pick up bargains left behind by investors who are ill prepared.
Take Jardine Cycle & Carriage (SGX: C07) as an example. It is a stalwart of the Singapore market. Since the turn of the Millennium, the conglomerate has delivered a total return of about 20% a year, which isn’t half bad.
But if you had the foresight to buy during the depths of financial crisis in 2008, the annualised return would have been 25%. Trouble is, would you have had the courage to do so, given the unrelenting bad news that appeared in the news day after day?
I’ll leave you this week with a thought from Jerry Seinfeld who said: “It’s amazing that the amount of news that happens in the world every day always just exactly fits the newspaper.”
The Motley Fool's purpose is to help the world invest, better. 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.
Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
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.