In investing, it’s not always the investors with the highest IQs who win – it’ the ones with the most emotional control. Investing legend Peter Lynch said as much with his quote that “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.” With that, it follows that having control over our emotions is key to us becoming better investors. How then can we keep our wetware in check? Here’re two tricks. 1. During mundane market conditions, prepare a wish-list of companies that you’d like to own at lower prices. We’re now more than six years…
In investing, it’s not always the investors with the highest IQs who win – it’ the ones with the most emotional control.
Investing legend Peter Lynch said as much with his quote that “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”
With that, it follows that having control over our emotions is key to us becoming better investors. How then can we keep our wetware in check? Here’re two tricks.
1. During mundane market conditions, prepare a wish-list of companies that you’d like to own at lower prices.
We’re now more than six years away from that fateful day on 10 March 2009 when the Straits Times Index (SGX: ^STI) bottomed out during the Great Financial Crisis. Since then, the index has more than doubled and our markets have been calm over the past two years.
Times like these, when market conditions aren’t choppy and volatile, represent a great opportunity for us to prepare a wish list of companies we’d like to buy when a fierce market decline happens (one will come someday; we just don’t know when).
Here’s how a wish list can be built:
Vicom Ltd (SGX: V01) and Raffles Medical Group Ltd (SGX: R01) may seem like great shares to own because of their great track record over the past decade; both shares have delivered consistent earnings growth and strong returns on equity while having rock-solid balance sheets.
You can see these in the three charts below (for the last graph, note the two companies’ high cash-levels in relation to their borrowings).
Sources: S&P Capital IQ
But, both companies aren’t cheap. Vicom and Raffles Medical, at their current share prices of S$6.63 and S$3.93, carry high trailing price-to-earnings ratios of 20 and 32, respectively. Those pricey valuations might cause you to want to wait for lower prices before making an investment in them. That makes absolute sense.
But instead of casting them out of your mind, you could consider noting down a price at which you’d be comfortable buying them. That would be your wish-list. In that way, if there’s a big crash tomorrow, you’d be ready to act using it.
In today’s relatively calm market environment, it’s easy to think that we’d all be fearless bargain hunters when stocks fall. But, when a real bear market comes mauling through, we may become paralysed by fear. And, that’s when the wish-list can help instill some buying-discipline in us during the best (but most fearful) times to buy.
2. Tune out the daily noise from the financial media.
My colleague Morgan Housel wrote last month:
“Maybe 1% of the news stories I read [over the last five years or so] were important. I can’t believe how much time I wasted reading things that didn’t matter. If someone from the future could write this morning’s newspaper, publishing only what turned out to be important, it would be 90% shorter.”
This is an important piece of experience from Morgan. Businesses don’t change daily but stock prices do. And if you subscribe to the idea (and it’s important that you do!) that the act of buying a share equates to buying a piece of a business, then tuning out the daily chatter from the financial media becomes a natural thing to do.
It’s not exactly a cakewalk to find great businesses at reasonable prices that you can buy for the long-term. Listening and following market chatter all day long will only heighten your senses of uncertainty and fear which would, more often than not, lead to rash investing decisions. So, try not to let the daily news make it emotionally tough for you to hold onto a good long-term investment.
Find some good investment blogs and websites (there’s us at the Motley Fool Singapore!) that espouse business-focused investing, and stick with them. Over time, you’d be able to judge for yourself how this advice is working out for you.
On a final note, remember – it’s the stomach, not the brain!
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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 Vicom and Raffles Medical Group.