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The Investor’s Biggest Problem During A Market Crash

August was an interesting month for stocks. Like my colleague Chin Hui Leong pointed out recently, the Straits Times Index (SGX: ^STI) had fell by more than 12% from peak-to-trough in that month.

September didn’t start on the best of notes either with the market index falling by 1.3% yesterday.

In times like these, the individual investor’s biggest problem rears its ugly head. What is this problem? It’s neatly encapsulated in a recent tweet from wealth manager and market commentator Josh Brown:

When stocks move violently, investors tend to forget that the underlying business values may not have changed much. Granted, that’s not always the case. But, if you can make yourself comfortable with the idea, you’ve won half the game.

There has been no shortage of instances of growing businesses being met with falling share prices.

Back during the financial crisis of 2008-09, I could count Riverstone Holdings Limited  (SGX: AP4), ARA Asset Management Limited  (SGX: D1R), and Vicom Limited  (SGX: V01) as examples. The trio had seen their share prices fall by at least 40% from peak-to-trough in that episode. And yet, as the chart below shows, their profits climbed consistently throughout the crisis period.

Profit growth for Riverstone, ARA Asset Management, and Vicom since 2006

Source: S&P Capital IQ

Investors who saw the trio’s falling share prices as opportunities have been richly rewarded. The table below shows how their share prices have changed since their pre-crisis peak.

Riverstone, ARA Asset Management Vicom share price change

Source: S&P Capital IQ

More recently, Neo Group Ltd  (SGX: 5UJ) and iFAST Corporation Ltd (SGX: AIY) may make for good examples eventually. In its last quarter, Neo Group’s revenue and profit had experienced year-on-year spikes of 62% and 202% respectively. iFast did not grow nearly as quickly, but it too delivered impressive quarterly top- and bottom-line growth of 22% and 25% respectively.

Over the past three months, Neo Group’s shares have fallen by 12% while iFAST’s tumbled by 15%.

The late investing sage Benjamin Graham was believed to have said that the stock market is a voting machine in the short run but a weighing machine over the long-term. When a stock’s price drops over the short-term, keep in mind that it does not necessarily mean that the business’s fundamentals have changed for the worse as well. Often, it may just be the voting machine wreaking temporary havoc.

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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 Neo Group.