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Pearls of Wisdom to Help You Tide Over Stock Market Crises

Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), ended today’s trading session with a 1.51% gain to 2,886 points.

This is likely a welcome reversal for investors from the 4.3% shellacking the index had received yesterday, a move which brought the index down by 19.9% from its 52-week high that was reached as recently as mid-April.

Is this the start of a sustained rally? Or is this just a dead cat bounce with more dreadful – albeit temporary – times to come? Thing is, no one knows for sure. But to help investors prepare themselves mentally for any possible future falls in stocks before the market bottoms out for sure, here are two pearls of wisdom.

Keeping the right focus

Ralph Wanger is a name that may not ring a bell even for many within investing circles, but he’s a bona fide legend in the investing business because of his track record: As manager of the Acorn Fund, Wanger clocked annualised returns of 16.7% from 1970 to 1997. This absolutely smoked the S&P 500’s (a U.S. stock market index) 13.7% yearly gain over the same period.

Here’s a wonderful analogy about the stock market that Wanger once drew:

“[There’s] an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum.

At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the [dog watchers], big and small, seem to have their eye on the dog, and not the owner.”

Investors often pay too much attention on a stock’s price (the dog) and not its business (the owner). A change in the spotlight’s focus can do wonders psychologically in the event of a market crash.

The Great Financial Crisis of 2007-09 was a devastating event for the stock market in Singapore with the Straits Times Index collapsing by two-thirds from peak-to-trough. Anyone who focused only on a stock’s price would likely be in a hurry to sell.

But for investors who know where to look, the market crash could be much easier to handle. Even throughout the crisis, dividends– which can be seen as a proxy for a company’s business performance – from Singapore’s blue chip stocks had in fact grown on average. Put another way, it’d appear that the decline in the prices of stocks during the crisis had been way overdone and wasn’t commensurate at all with how some companies’ businesses were doing.

Sticking with it through thick and thin

The following smart quote comes from Nick Murray, an acclaimed and award-winning financial advisor:

“[US]$6,200,000,000

Yes, that’s right, it’s six billion two hundred million [US] dollars. A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?

It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market?

The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.”

The market falls every now and then. But investors who are holding onto shares of great businesses should hold on tight through thick and thin – because there’s great value in doing so. Sticking with the example of Buffett that Murray had used, here’s where Berkshire Hathaway’s A-class shares were trading at on 17 July 1998: US$75,500. This is where the same shares closed last night: US$196,005.

Murray once said that “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” That’s a pearl of wisdom (a bonus!) that I’d like to sign off here with.

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 Berkshire Hathaway.