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How You Can Handle An Unpredictable Stock Market

Credit: Simon Cunningham

One of the toughest things about investing, in my opinion, is trying to handle the unpredictability of the stock market. There’s just no telling what stock prices can do over the short term.

The table below, which shows how the earnings and share prices of Straco Corporation Ltd (SGX: S85) have changed over certain periods of time, illustrates the challenge well:

Straco's share price and earnings per share table
Source: S&P Global Market Intelligence; author’s calculations

Let’s take a few examples from the table.

In 2007, Straco’s shares gained 54%, mostly in line with its 61% jump in profit. But in 2008, a 32% increase in the company’s earnings was met with a 51% decline in its share price. In 2010, despite enjoying a massive 85% spike in profit, Straco’s shares ended the same year just 3.8% higher. 2011 saw a reversal – a meagre 3.2% increase in profit did not deter the market from pushing Straco’s share price 33% higher.

Benjamin Graham, one of the greatest minds to grace the investing world in my view, was believed to have said that the market was a voting machine in the short run but a weighing machine over the long-term.

From 2005 to 2015, Straco’s earnings per share had jumped by 35-fold in total, driving a 487% jump in the company’s share price. But over the short-term, as we’ve seen, impressive earnings growth from Straco could just as easily result in mediocre share price returns (or even losses) as solid price gains.

I have one big takeaway from all this, and that is, the best way to handle an unpredictable stock market is to find great companies and invest for the long term. There’s hardly any point in finding a great, growing company only to invest in it for a year or two with the mindset that just because its earnings were to grow, you’re bound to receive a bounty in that timeframe you’re invested for. The stock market does not work like this.

But, if you stick with a great business over the long-term, chances are you’d be well-rewarded at the end of it. Volatility in the stock market becomes less and less important the longer you’re invested for.

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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 Straco Corporation.