How You Can Better Handle Extreme Price Volatility

Commodities trader Noble Group Limited (SGX: N21) and diamond manufacturing technologies provider Sarine Technologies Ltd (SGX: U77) are engaged in very different businesses.

But, they do have one thing in common: They’ve both caused lots of pain for their shareholders in recent times.

With Noble Group, its shares have fallen by some 26% over the past two months (from S$1.20 on 15 February 2015 to S$.0885 today) after its business had been criticsed by two different research outfits. As for Sarine, it had experienced a fall of more than 20% in a single day on Monday.

Given the sharp declines both shares had gone through, I guess it’s safe to say that most investors would have been very uneasy about the situation.

But as it turns out, my colleague, Chong Ser Jing, who is a shareholder of Sarine, was very much his usual cheerful self when the company’s shares fell on Monday. He even went on to write an article about the reason for the price decline.

My friends who have invested in Noble’s shares though, were far less sanguine. As Noble was falling, I got panicked calls from them asking me about my opinion on the company and what they should be doing with their shares, which are now deeply in the red.

I was very intrigued by the differences between the way Ser Jing and my friends had responded to the same situation of seeing their investments fall sharply in value.

But as I thought about it, their different responses had stemmed from the gulf in the manner in which they view their investments. And that –the way one thinks about his or her investments – is the key to be able to better handle the moments of extreme price volatility which can test our faith in investing.

According to my conversations with them, both groups – Ser Jing, and my friends who were invested in Noble – had looked at their respective investments as “long-term” ones. The difference is that “long-term” to Ser Jing is a timeframe that’s measured in years and decades while “long-term” to my friends refers to a period that’s less than a year.

Moreover, Ser Jing had spent months researching Sarine. In his eyes, Sarine’s innovative spirit can help improve its profitability for many years to come. With him looking at Sarine’s future prospects over a multi-year period, that one day crash is just a temporary blip.

My friends who had invested in Noble, however, had mostly done so based on “tips” they’d heard from somewhere that the company’s shares will “pop” over the next six months or so.

As they have no knowledge about Noble’s past business fundamentals, much less the company’s possible future, the sharp fall in price has left them confused over what to do next. Put another way, their gamble in Noble’s shares did not pay off over the short-term and their lack of research caused them to have no confidence at all to hold onto the investment for the long-term.

Foolish Summary

These anecdotes I’ve shared show us how we can withstand moments of extreme share price volatility.

For us to feel confident about our investments, we must know enough about them to be unaffected when untoward – but temporary – developments happen. Furthermore, if we are able to adopt a long time-horizon (hopefully measured in decades!) with most of our investments,  we might be less affected by the day to day fluctuation in share prices and thus become less prone to making mistakes because of our emotions.

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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 Stanley Lim does not own any companies mentioned above.