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How You Can Better Handle Market Volatility

Investment manager and financial columnist Barry Ritholtz had recently teased out some fascinating statistics from a number of U.S.-listed shares, namely Google, Tesla, Chipotle Mexican Grill, Netflix,and Apple. He reveals:

  • “Netflix has lost 25 percent of its value on four separate days. Not over four days; on separate occasions, it lost 25 percent in a single day. In one four-month stretch in 2011, it lost 80 percent of its value. On Netflix’s worst day, it fell 41 percent.
  • Chipotle has lost 15 percent in a single day on four occasions. During the 2007-2009 crash, it lost 76 percent of its value — about 50 percent worse than the market overall.
  • Tesla went up 400 percent in 6 months, then lost 40 percent over the next 10 weeks. In one month, it lost about 25 percent of its value.
  • Google lost nearly 70 percent in the Great Recession. During its worst quarter, its stock price fell more than 36 percent.
  • Apple has lost 25 percent or more six times in the past 10 years alone… During its worst week, it was cut in half, falling 51 percent. It saw similar damage during its worst month and quarter as well — getting cut in half in each time period.”

Short-term pain for long-term gain

If you’re wondering what’s fascinating about these figures, besides the fact that the five afore-mentioned shares had seen incredibly painful losses, consider the following: Since they’ve became publicly-listed entities, Google, Tesla, Chipotle, Netflix, and Apple have gained 1,282%, 1,352%, 2,865%, 5,816%, and 22,288%, respectively, according to Ritholtz. These mind-boggling returns had happened despite all the sharp declines they had suffered in the interim.

Share IPO date Returns to date
(4 October 2014)
Google August 2004 1,282%
Tesla June 2010 1,352%
Chipotle January 2006 2,865%
Netflix May 2002 5,816%
Apple December 1980 22,288%

Source: Barry Ritholtz and S&P Capital IQ

All the figures above had come from an article Ritholtz had penned for The Washington Post titled “The world’s greatest stock picker? Bet you sold Apple and Google a long time ago.” In it, he highlighted how the five shares’ sharp declines from time to time would have caused most investors to sell out of fear due to the way our brains are wired. This thus prevents most of us from fully experiencing the shares’ stupendous long-term gains. And, that’s the painful truth for investors – we’re just not built to handle market volatility in a way which can maximise our long-term returns.

A glimmer of hope

But, not all hope is lost, in my opinion. That’s because having the right focus might help us better handle day-to-day market volatility, allowing us to own shares for the long-term without bailing out during times of temporary distress. So what’s that right focus? Glad you asked – it’s for us investors to concentrate on the progress of a share’s business,and not its price.

Chipotle and Google are actually great examples of how this might work. As you can see in the chart below (click on the chart for a larger view), revenues and cash flow from operations (CFFO) for the two companies were still growing throughout the Great Recession of 2007-09.

revenue and cash flow for Chipotle and Google 2

Source: S&P Capital IQ

So despite their shares collapsing by up to three-quarters during the crisis, their businesses were still increasing in value. And recognising that fact might just help an investor handle falling prices with equanimity and thus hold on for the long-term. As billionaire investor Warren Buffett once said:

“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

In order to earn out-sized returns over the long-term, there’s a lot of value to be had for investors to focus on the playing field (the progress of a share’s business) instead of the scoreboard (the share’s price).

Foolish Bottom-line

It’s a common occurrence for winning shares around the world to drop precipitously in price from time to time.

In Singapore’s share market, companies like Jardine Cycle & Carriage Limited (SGX: C07), Super Group Ltd. (SGX: S10), and Jardine Strategic Holdings Limited (SGX: J37) have gained at least 550% in price since the start of 2004. And, those returns have occurred despite their shares facing sharp declines every now and then. For instance, Super Group fell by close to 70% during the Great Recession while the other two Jardines suffered drops of between 50% and 60% in the same period.

Share Price gains since the start of 2004
Jardine C&C 596%
Super Group 551%
Jardine Strategic 753%

Source: S&P Capital IQ

As these shares – Google, Tesla, Netflix, Chipotle, Apple, Jardine C&C, Super Group, and Jardine Matheson – have demonstrated at times, the price to pay for great long-term returns is some short-term pain.

That certainly sounds like a good exchange to me. What do you think?

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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 writer Chong Ser Jing owns shares in Netflix, Chipotle, Apple, and Super Group.