3 Simple Steps to Avoid the Share Market’s Tricks

Avid Foolish readers may have heard that the share market can play tricks on us. Stare at share prices too long, and you may begin to see patterns that don’t exist. Or chase big money rewards, and we may forget about the probabilities of actually getting it. The scary bit about all this is that the mental tricks may occur without us knowing.

Thankfully, there are simple things we can do to combat these tendencies. Here are 3 simple steps to take to persuade ourselves to think longer term.

1. Write down the reason why you bought the company

When you buy shares of a company, there should be an investment thesis on why you think that the shares can perform well over the long term. Make sure you write it down and add to it over time as you learn more. For instance, an investment thesis for instant coffee purveyor Super Group Ltd. (SGX: S10) could be the track record of branded consumer product growth in South East Asia, and a potential new market in China. These notes will be helpful to remind your future self on why you bought the shares in the first place. So, whenever you are feeling less confident of your own shares, check back on your notes. Has anything material changed from your thesis? Make decisions based on the business developments, not based on share price movements.

2. Note down relevant financials and valuations of the company

Besides the thesis, note down the share price, and relevant financial figures and valuation metrics at the point of the purchase. This could be the price to earnings ratio, and the earnings per share. Or the free cash flow per share (FCF) and FCF yield (FCF divided by share price). Every quarter or so, have a look at where the share price is, and how the valuations have changed.

In one instance, a growing company could see its FCF grow, but the share price stagnante. This means that its FCF yield would be higher – marking a better value point for a company. If the future prospects remain unchanged, it could be a candidate for a buy.

3. Write down the date of the share purchase

This may seem like a basic move. However, from experience, I have seen many new investors grow restless quickly when their share prices don’t move. Or be too eager to act when share prices fall. The simple act of noting down the date of purchase will help remind ourselves of the time that has passed since we bought the shares.

If its less than three months, there is a good chance that there was no new material information (like earnings announcements) that would inform us on why the share price changed. Instead, there is a good chance that the movement of the share prices are just general volatility.

Foolish take away

The biggest advantage of the long term investor is the accumulated knowledge of the shares that he or she holds. It is the knowledge accumulated over time that will make the difference when share prices fall, or when businesses experience temporary setbacks. This knowledge will help you better judge business situations, and get better over time. If we can do this, we may just put one over back at the Straits Times Index (SGX: ^STI), and beat the market over time.

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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 Chin Hui Leong owns shares in Super Group.