There is certainly no shortage of bad news to keep even the most hardened investor awake at night. If it’s not one thing then it is another. No sooner have we recovered from the shock devaluation of the Chinese yuan and a potential interest-rate rise in the US, than we have to contend with economic slowdown in many parts of Asia, driven primarily by China’s need to quickly rebalance its economy. Rainy days It doesn’t rain but it pours, as the old saying goes. But as hard as it may be for many investors to accept, market falls happen every…
There is certainly no shortage of bad news to keep even the most hardened investor awake at night. If it’s not one thing then it is another.
No sooner have we recovered from the shock devaluation of the Chinese yuan and a potential interest-rate rise in the US, than we have to contend with economic slowdown in many parts of Asia, driven primarily by China’s need to quickly rebalance its economy.
It doesn’t rain but it pours, as the old saying goes.
But as hard as it may be for many investors to accept, market falls happen every now and again. But if we are truly long-term buyers of shares, then shouldn’t mind if stock prices drop once in a while, just so we can buy more at a better price.
But we do need to learn to learn to control our emotions, though.
Fear and greed
Fear and greed are two words that Warren Buffett uses often to describe the behaviour in stock markets. They are unquestionably powerful emotions. They can also be greatly amplified when mixed with a dose of recent-event syndrome. This is where something is considered to be vitally important, simply because it is the most recent thing that has happened.
Consequently, when we see the price of our investments fall, it is very easy to convince ourselves that somehow the decline must be attributed to something that has recently happened – even if the drop and the recent events might be completely unconnected.
Even if we don’t make the connection ourselves, there will be no shortage of experts who will try to connect the imaginary dots for us.
But whilst Buffett’s sage words about fear and greed make perfect sense in theory, it is never that easy to completely eradicate emotions when we invest. This is partly because of our in-built fixation on the price we have paid for our investments.
However, it is crucial to remember that the price that we have paid for a particular stock matters to nobody out there in the market, other than ourselves.
One way to overcome the difficulty of letting emotions get in the way of logic is to ignore entirely the price we have paid for a share. Instead, focus on other attributes such as the dividend forecast, the prospective earnings and the net asset value. So, related those various measures to the current share price, instead.
In other words, think only of the present and the future, rather than anchor on the past. That is what everyone else in the market will be doing, apart from you, if you are one of those investors who are continually consumed by the price that you once paid for a stock.
Consider for instance how many brokers have jumped on the bandwagon to cast a shadow over Real Estate Investment Trusts (REIT). Some of their gloomy forecasts could be right, of course.
But not all REITs have been similarly affected. Some, that include Fraser Centrepoint Trust (SGX: J69U) and Mapletree Industrial Trust (SGX: ME8U) have even increased their distributions to shareholders.
So be careful about tarring every company with the same brush. If you own a REIT and the share price has fallen, but the payout has not, then that could be good indicator that someone, somewhere has got their sums very badly wrong.
It is worth repeating that the price we have paid for a share is irrelevant. It is commonly known as a ‘sunk cost’. What matters, instead, is how much the investment is worth now. If it is significantly overvalued today, then you might consider selling it.
However, if it is seriously undervalued, then it could be worth considering buying more. Crucially, whether the shares in our portfolios are in the red or in the black should not have any bearing on our decision to buy or sell – that is unless you are a predisposed to recent event syndrome and are always anchored to the past.
A version of this article first appeared in The Straits Times.
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