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iPhone Giant Apple Shows Investors How They Should Handle A Bear Market For Stocks

Singaporeans love their smartphones. According to a recent survey by Deloitte’s Global Technology, Media and Telecommunications, Singapore ranked first in the world in terms of smartphone penetration rates.

With this in mind, Apple Inc, the consumer technology giant behind the iPhone, would be a very well-known company in Singapore. But beyond providing consumers with cool tech gizmos, it’d appear that the company can also provide investors here with investing wisdom, particularly those pertaining to how a market decline should be handled.

Apple’s stock has fallen hard over the past month, dropping by nearly a quarter from more than US$130 in mid-July to US$103 last night. The sharp decline may have caused investors to worry that the high-flying growth company’s business (Apple’s revenue and profit enjoyed very impressive year-on-year growth rates of 27% and 33%, respectively, in its latest quarter) may have lost its lustre.

Investors who had those fears may be able to rest a little easier tonight because of a letter that Apple’s chief executive, Tim Cook, had sent to stock market commentator Jim Cramer. Here’s the content of Cook’s message:

“Jim,

As you know, we don’t give mid-quarter updates and we rarely comment on moves in Apple stock. But I know your question is on the minds of many investors.

I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations have actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.

Obviously I can’t predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge.”

In short, Apple’s business continues to do fine, at least according to Cook. There’s one big takeaway for investors here: The short-term performance of a stock need not reflect how well its underlying business is doing.

This is important to keep in mind during bear markets, when stocks fall hard. Often, the business may be doing just fine – it’s just the stock that’s reacting to all sorts of other influences over the short-term. This appears to fit Apple’s situation to a tee.

There are other instances when a focus on a stock’s business and not its price can be very helpful when dealing with market declines.

During the Great Financial Crisis of 08-09, Singapore’s stock market was shellacked with the Straits Times Index (SGX: ^STI) falling by two-thirds from peak-to-through. But despite the general market malaise, there were companies that managed to grow their businesses. One example’s glove maker Riverstone Holdings Limited (SGX: AP4); you can see how its business fared from 2006 to 2010 in the table below (note the consistent profit growth):

Year Riverstone’s net income
2006 RM22.5 million
2007 RM22.8 million
2008 RM24.4 million
2009 RM29.5 million
2010 RM40.4 million

Source: S&P Capital IQ

Investors who held on tight to Riverstone’s shares at its pre-crisis peak of S$0.55 through the crisis (when shares of the glove maker fell to a bottom of around S$0.40) would be a happy bunch today. Riverstone’s shares are exchanging hands at S$1.59 apiece at the moment.

Singapore’s stock market nearly fell into a bear market (defined as a fall of 20% or more) yesterday when it closed at 2,843 points. At that level, it was down by 19.9% from its 52-week high of 3,550 points that was reached in mid-April.

There are many other stocks in Singapore that would have fallen hard as well. How are their businesses doing? If you find a firm with a falling share price but growing business, you may have found yourself a winner in the stock market (provided that the company’s shares had dropped to a reasonable valuation, of course!).

For those who are sitting on losses as a result of the recent decline, take a moment to look at how the businesses that underlie the stocks you own are doing. Like Apple, their businesses may be humming along nicely although their share price may not – temporarily. But that’s just fine. As Benjamin Graham, the dean of value investing, was believed to have said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

If you own strong and growing businesses – and had bought them at reasonable prices in the first place – the weighing machine will more likely than not work in your favour over the long-term.

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 Apple Inc.