American philosopher William James once said that “the art of being wise is the art of knowing what to overlook.” Here’re some things to overlook in our attempt to become wiser investors. 1. Short-term volatility Keeping your eye on the long-term health of a stock’s business is way more important than worrying about the daily, monthly, or even annual jiggles of its price. Healthcare services provider Raffles Medical Group Ltd (SGX: R01) is a good example. Since the start of 2005, Raffles Medical Group has seen its earnings per share jump by 439%, leading to a massive 942% increase in…
American philosopher William James once said that “the art of being wise is the art of knowing what to overlook.” Here’re some things to overlook in our attempt to become wiser investors.
1. Short-term volatility
Keeping your eye on the long-term health of a stock’s business is way more important than worrying about the daily, monthly, or even annual jiggles of its price.
Healthcare services provider Raffles Medical Group Ltd (SGX: R01) is a good example. Since the start of 2005, Raffles Medical Group has seen its earnings per share jump by 439%, leading to a massive 942% increase in its share price over the same period.
But while Raffles Medical has been a great long-term winner, its shares have been extremely volatile (on the downside) along the way.
Source: S&P Capital IQ
The chart above shows the maximum peak-to-trough loss (known as the maximum drawdown) that Raffles Medical’s shares have suffered in each calendar year from 2005 to 2014. In those ten calendar years, the healthcare stock’s price has experienced a maximum drawdown of 10% or more in nine years.
2. Macroeconomic forecasts
Warren Buffett, a revered figure in the investing community, has summed up just why investors should ignore macroeconomic thinking and forecasts when investing in stocks. This is him in his 1994 Berkshire Hathaway annual shareholder’s letter:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.
Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.
Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
For a more recent account of Buffett’s thinking on the matter, this is what he said in an October 2014 interview on business newswire CNBC:
“We’re not making any judgement on where the market’s going or we’re not looking at any macro factors. My partner Charlie Munger and I have been working together now 55 years.
We’ve talked about every business you can imagine – and stocks. We’ve never had one decision that involved a macro factor. This doesn’t come up. I mean if I talked to Charlie about something we’re going to buy up in Alberta, or just anything, we don’t get into macro – it just doesn’t make any difference.
We do decide whether we think where the business will be in 10 years or 20 years, and we know what we’ll pay in terms of valuation. But we really don’t care whether the Fed is going to increase interest rates a hundred basis points or 200 basis points next week [emphasis mine].”
Investing with a focus on businesses has paid off well for Buffett. Over his past 50 years leading Berkshire from 1965 to 2014, Buffett has helped the conglomerate grow its book value per share (a good proxy for the real intrinsic worth of the company) at an amazing annual compound rate of 19.4%.
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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 Raffles Medical and Berkshire Hathaway.