What to Do When Your Stocks Crash

Sometimes, things don’t go our way.

This sentiment was evident while I was reading about a football match between the Italian football clubs, Inter Milan and Sampdoria. The latter had dominated the game, racking up 19 shots on goal and taking the lion’s share of possession in the game. The final score, though, did not match Sampdoria’s efforts for the day. Inter Milan, which had only six shots at goal, ran away as winners by three goals to one.

Understandably, the Sampdoria coach was livid at the results. He did not understand how his team could have lost. Some of us might feel the same way when we invest.

Football imitates investing  

If we had started investing at the start of 2015, it wouldn’t be surprising if we had many losing stocks in our portfolio despite our best efforts.

As a whole, Singapore’s market barometer, the Straits Times Index (SGX: S68), fell almost 15% in 2015. Of the 30 component stocks that make up the index, only seven offered a positive return last year. There were some that did worse than others. In 2015, Noble Group Limited  (SGX: N21) and SembCorp Marine Ltd (SGX: S51) brought up the rear with negative returns of 64.6% and 44.1% respectively.

We might get upset when our stocks go down. But in such times, it could be more important to remind ourselves about the difference between investment processes and outcomes. Here’s a chart in investor James Montier’s book, Value Investing: Tools and Techniques for Intelligent Investingwhich can help:

Table for good and bad investment process

Just like the football match, there will be times when our investment process is sound (picking an undervalued business), but the outcome turns out to be bad (a falling stock price). As investors, we may want to distinguish between a stock’s price performance and its business performance.

After all, the stock market is a place where a stock’s price movement over the short-term may not always match what is happening with the underlying business of the stock.

As such, it may be critical for an investor to understand whether a lower stock price is caused by a weak business performance or just general malaise in the stock market. In doing so, we may better judge stock market losses on their fundamental merits, rather than on just short-term price movements.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.