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Should I Keep A Rising Stock?

There is one restaurant in Singapore that I go to regularly. In fact, I am there for lunch almost every Sunday.

That might seem a tad boring to some people. But familiarity can have its benefits. I know just about everything that I need to know about the eatery.

I know the team of waiting staff by name. I know the menu off by heart. And I would probably know if the chef had a row with his wife the night before.

Back pocket

Knowledge can, therefore, be a powerful tool to have in our back pockets.

I would, for instance, know if there was ever a dip in the restaurant’s standards. What’s more, I would feel confident enough to say something about it.

Investing can be a lot like that too.

We should always try to become as familiar as possible with the companies that we choose to put our money into. That can take time. It is also a good reason for not getting involved with too many companies at the same time.

By all means have a diversified portfolio. But don’t try to own more companies than you can handle.

But that is not always the case, with some investors.

Know nothing

Some people, it seems, are more comfortable investing in something that they might know nothing about. Or as investing legend, Peter Lynch, observed: “There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.”

Consequently, we should try to understand the nature of the companies we own and the specific reasons we have for holding them. Just because a stock is going up is not a good enough reason for keeping it in our portfolios.

By the same token, just because a stock is going down is not a good enough reason for selling it either.

We need to remember that often, there is no correlation between the success of a company and the success of its stock over the short term.

Good companies

But over the long term, there can be a strong connection between a company’s success and the success of its stock. That is why it is important to stay focussed on the long term and to stay invested in good companies.

It is also a good reason for knowing as much as possible about the company. The disparity between the financial performance of the company and its stock price is the key to making money.

The talk last year about the demise of Real Estate Investment Trust is a good example. Rather than  crumble in the face of a weak economy the 20 companies that make up the SGX S-REIT 20 Index generated a total return of 7.2% between the start of the year and 22 March 2016.  Some of the best performers include Suntec REIT (SGX: T82U) and CapitaLand Commercial Trust (SGX: C61U).

But if you don’t know enough about the business, it is unlikely that you would even recognise “disparity” if it came up and shook you by the hand.

Handling volatility

Currently, volatile markets are something that we, as investors, have to contend with.

It is not uncommon, for instance, to see share prices swing wildly on the back of nothing more than a whisper, a hint, a rumour or the outcome of a G7 meeting in Ise-Shima.

But stock market declines are nothing to be concerned about. In fact, if we are prepared, it can’t hurt us.

What’s more, a decline could even be a great opportunity to snap up bargains left behind by those who don’t know what they are doing.

Warren Buffett said: “Price fluctuations are there to provide opportunities to buy wisely when prices fall sharply. At other times you would do better to forget the market and pay attention to the operating results of companies.

There was a time when I would have been as freaked out as the next person when markets crashed. But today, I just lick my lips and see it as another buying opportunity.

So rather than focussing on the price of a stock, focus instead on what is happening at the companies.

That is a better much use of our time because we should learn to be long-term investors, not short-term speculators.

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.