Why A Watched Stock Never Boils

One of the first kitchen skills I learnt as a young boy was how to cook rice, properly. It was long before the days of rice cookers and microwaves.

I am not about to teach grandma how to suck eggs. But whether you cook rice in a clay pot – as I still do today – or in one of those new-fangled electrical contraptions, the basic rules are the same.

Waiting is hard to do

Wash the rice to remove excess starch and foreign bodies, add just enough water, bring it to the boil, turn down the heat to a flicker and leave it to simmer, whilst waiting for the beautiful fragrance of cooked rice to permeate the room.

That last part – waiting – is probably the hardest.

Inexperienced cooks can’t help but meddle. They will continually lift the lid to see how the rice is doing. But as soon as you do, then you have failed. Your rice will not be fluffy and light, as it should be.

Before you think that your weekly Take Stock Singapore newsletter has morphed into “Kuo’s Kitchen Nightmare”, there is a serious investing point to be made here.

Leave things alone

When we invest, we should research our stocks thoroughly, to make sure that we discard any foreign bodies that do not deserve to be in our portfolios. After we make our purchase, we must let our investments simmer, slowly.

Provided we have done our homework properly, we must leave things alone.

Just sit back and enjoy the sweet scent of money, as it makes it way through the company’s cash flow and into our bank accounts in the form of regular dividends.

Unfortunately, some people can’t stop themselves.

They monitor the performance of their investments by looking up the share price of the companies every day (if not more often), as though that really makes a difference. It doesn’t. It could leave you as baffled as Adam on Mother’s Day.

Up and down

Warren Buffett recently said: “Money is made in investments by investing and by owning good companies for long periods of time. If we buy good companies, buy them over time, we’re going to do fine 10, 20, 30 years from now.

Unfortunately, many people try, to meddle. Consequently, they worry when their shares go down a little. They also think that they should sell them when they go up a little.

If you do that, then you are unlikely to have very good results.

Many people – some professionals included – believe that a share price is somehow a reflection of how well a company is doing. It doesn’t.

A share price is merely a consensus view of the people of who either want to buy or sell a stock. Consider how brokers took a dim view to Singapore Real Estate Investment Trust last year.

Their bearish outlook on the outlook for the sector sent the share prices of many REITs significantly lower. Suntec REIT (SGXL T81U) lost a quarter of its value, before recovering; SPH REIT (SGX: SK6U) and Ascendas REIT (SGX: A17U) both lost a fifth of their values before recovering.

Own good companies

When there are more buyers than sellers, the price of a stock could rise. When there are more sellers than buyers, the stock price could fall. People buy and sell for all sorts of reasons. It really is as simple as that.

If you bought a portfolio of stocks today, and it did nothing other than provide a dividend yield of 5%, you should have recouped your capital in just dividends alone in 20 years.

If your portfolio could grow its dividend at a modest rate of 5% a year, the return on your investment would be even higher. You could recoup your investment even faster.

Stop meddling

That is how we should be viewing our investments – by owning good companies that can grow over a long period of time.

Peter Lynch once said: “A watched stock doesn’t boil.” He is right.

But apart from not watching the share price continually, we should also not meddle with our investments. Focus on the things that really matter.

Instead of checking a stock’s price constantly, look at the earnings and dividends over the years to determine if you have made a good investment.

That is the right way to invest. To be fixated by the stock price is the wrong way.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock – Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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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 Director David Kuo doesn’t own shares in any companies mentioned.