Why Volatility In The Stock Market Is Great For Long-Term Investors

Stock markets across the world have fluctuated tremendously since the beginning of this year, possibly spreading anxiety among investors.

That’s because some investors see volatility – the act of stock prices gyrating up and down – as risk. But, is volatility really the same thing as risk? Personally, I think the answer is both yes and no.

The answer’s yes if you are a speculator who tries to predict price movements – an increase in volatility likely makes it more difficult for you to execute successful trades. Meanwhile, the answer’s no if you are a long-term investor who has a focus on the underlying business of a stock and who aims to invest in sound companies at reasonable prices.

In fact, volatility could even benefit long-term investors. We can see how this works out by using Raffles Medical Group Ltd (SGX: R01) as an example.

Raffles Medical has shown steady grown in both its revenue and profit over the past decade, as you can see in the chart below:

Raffles Medical's revenue and profit
Source: S&P Global Market Intelligence

Given that these attributes are often highly appreciated by the market, the company has almost never traded at a cheap valuation over the past five years. At its current share price of S$4.35, Raffles Medical is valued at 36 times its trailing earnings and 4.2 times its book value. At their peak in 2015, Raffles Medical’s shares were trading at S$4.99 each.

In January this year, fluctuations in the market had given investors the opportunity to purchase shares of Raffles Medical at prices between S$3.90 and S$4.00. Those who bought, have already made an unrealised gain of 10% or so in slightly more than a month.

Assuming that Raffles Medical can continue growing its business at a strong clip in the future as it has done in the past to make up for its current high valuation, long-term investors who bought in January 2016 when the market pushed Raffles Medical’s shares to the neighbourhood of S$4.00 may just have benefited from short-term volatility at that time.

Foolish takeaway

Though there are many ways to make a profit in the stock market, long-term investors prefer to invest in good companies with intrinsic values that can grow over time. For such investors, short-term volatility bothers them little. Instead, it can be used as an opportunity to purchase good companies at attractive prices.

But bear in mind that while stock market volatility is potentially beneficial for long-term investors, volatility in the business environment can be a real risk. This is because a volatile business environment can make it difficult for management to execute long term-strategies and plans.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.