Tuning Out the Noise to Win in Investing

On Monday, a news headline proclaimed that “After Six Years, U.S. Stocks are Back to Normal: Chaos”. And chaos it seemed, had showed up in the form of a volatile stock market.

The newswire reported that the S&P 500 – a US stock market barometer – had seen 16 days of 1% movements since the start of the year.

While there might be other market participants who think that’s a big deal, thing is, for Foolish investors, such information turns out to be rather (meh!) redundant.

Volatility and scary headlines are normal

That’s because how volatile the market has been tells us very little about future returns.

Take a look at the graph below from my fellow Fool Ser Jing. It shows the number of days in each calendar year from 1988 to 2014 in which the Straits Times Index (SGX: ^STI) had gained or lost 1% or more:

Chart of Straits Times Index's volatility

Source: S&P Capital IQ

In relation to what we see on the graph, this is what Ser Jing has previously pointed out:

“You can see that 1998 and 2008 were especially wild years, 2000 was clearly volatile, and 2005 and 2013 were eerily quiet. How did the market do in the subsequent year for each of the quintet?

  1. 1998 was a volatile year – 1999 saw the Straits Times Index rocket by 78%.
  2. 2000 was certainly jumpy as well – the Straits Times Index went on to lose 16% in 2001.
  3. 2005 was an exceptionally quiet year – 2006 saw Singapore’s market barometer gain 27%.
  4. 2008 was a real roller-coaster – 2009 saw the index do really well with a 57% jump.
  5. 2013 was library-like – 2014 was a decent year in the market with the Straits Times Index climbing close to 8%.”

So, given all that, we should perhaps be looking at volatility in a different way.

Keeping your wits on rocky boats

Point is, volatility – or newspaper headlines trumpeting volatility – should not be the things that scare us out of investing. As another of my fellow Fools David Kuo would put it:

“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.”

To keep our wits, we can start by tuning out the noise from volatile share prices and the daily financial media, and focus on businesses instead.

Take a look at a few companies that have grown their earnings considerably over the past decade despite all the short-term market volatility. They are namely, corporate marketing services provider Kingsmen Creatives Ltd (SGX: 5MZ), instant coffee maker Super Group Ltd (SGX: S10), and health-care provider Raffles Medical Group Ltd (SGX: R01).

You can see their consistent earnings growth in the chart below:

Earnings growth for Kingsmen, Raffles Medical, and Super since 2004

Source: S&P Capital IQ

In addition to expanding their profits, the trio have also steadily upped their financial robustness through the years. This can be seen from the growing cash levels (with debt being kept lower than cash) on their balance sheets:

Balance sheet figures for Kingsmen, Raffles Medical, and Super since 2004

Source: S&P Capital IQ

The solid long-term business performances of the trio have rewarded their shareholders well. Shares of Kingsmen, Super Group, and Raffles Medical have grown by 439%, 641%, and 970% in price, respectively, since the start of 2004; it’s also notable that the share prices of the trio have grown past any short-term worries over volatile markets (just like how their earnings did).

Foolish take away

As such, for the Foolish investor, our time may be better spent away from the noise of the chaotic media, and more towards the businesses that might chug past all the short-term worries and steadily grow over the long-term.

As the captain of our own portfolios, we may not have control on where the market goes, but we may influence where our portfolio heads over the long term. To end – and to that point – here’s a wonderfully apt quote from Jimmy Dean:

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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