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3 Quick Investing Lessons To Learn From Brexit

Last Thursday, the United Kingdom voted to part ways with the European Union.

Around the world, stock markets fell on the following Friday. In our Garden City, the Straits Times Index (SGX: ^STI) ended the day with a 2% decline.

The fall in many markets could be a sign that a large number of investors did not expect “Brexit” to happen. In any case, there are a few lessons investors could learn from this event. Here’re three:

1. Few saw it coming

Before the vote, polls indicated that Brexit would not happen. In fact, a leading Brexit supporter also didn’t expect it to occur. The Brexit surprise teaches us that unexpected events can happen from time to time.

In an investing context, it may thus make sense to ask: Can the companies we own weather occasional yet unexpected economic storms?

2. Can you illustrate your company with a crayon? 

Brexit might cause you to be anxious over the stocks you own. If so, it could be a symptom of a deeper concern.

You might want to ask yourself if you really understand the businesses that you own. It is possible that you are not able to tell whether Brexit will have an impact. If so, it could be a case of you not understanding the companies in your portfolio as well as you thought you did.

Understanding a company’s business well can help us psychologically ride through unexpected events such as Brexit. It can help us decide if Brexit – or any other unexpected geopolitical or macroeconomic event – has the capability to deliver a mortal blow to the companies we own in our portfolio.

3. Focus on value, not price

As results from the UK’s vote filtered through last Thursday, stock markets around the world started tanking. While it may be a scary event for some investors, what it means is simply that the price tag for companies have fallen.

A falling stock price says little, if at all, about changes in the value for the affected companies.

Let’s look at airline catering outfit SATS Ltd (SGX: S58) for instance. Its share price has declined since last Thursday, moving from S$4.17 to S$4.11 currently.

But let’s also take a look at its business performance. The company reported $380 million in net cash on its balance sheet, as of 31 March 2016. SATS also raked in over $220 million in free cash flow during the quarter. Has the business’s performance changed? We won’t know for sure until SATS reports new results, but so far, it hasn’t.

If we are fixated on a company’s stock price movements, we might think that SATS is not doing well. But if we focus on the business performance, we will see that nothing much has changed since last Thursday’s vote.

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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 company mentioned.