The Best Way To Deal With Uncertainty

Does anyone talk about Brexit anymore?

There is a joke going around the UK that many would much rather sweep the whole referendum episode under the carpet.

Even some who voted to leave the European Union are hoping that if they don’t mention it, then maybe everyone will forget that it ever happened.

But it was no laughing matter at the time.

Stock markets around the world wobbled, as uncertainty swirled over what would happen after Brexit. There were also questions as to who would take over as the next Prime Minister of the United Kingdom.

But guess what?

No Lehman moment

There was no Lehman moment, though some might want you to think that there was.

In an attempt to turn a tragedy into a calamity, journalists resorted to describing the stock market fall on the Friday after the referendum as “the biggest points loss since the Great Recession.”

I don’t blame them. They are in the business of selling newspapers in uncertain times. But we, investors, should be in the business of buying shares in moments of turbulence.

Technically the scribblers are correct. The Dow Jones Industrial Average did fall 610 points on the Friday.

But in percentage terms, it was only a 3.3% decline, which hardly registers as a tremor in the history of the stock market. It wouldn’t even have been a story, had it not been for the Brexit backdrop.

Overegging the pudding

If anything, it goes to show just how far the US benchmark has come. But journalists conveniently left out that crucial part.

Some 30 years’ ago, a 600-points fall would have been a big deal. It would have represented a 25% fall in the key US stock-market index, which would have been quite catastrophic.

But today, it doesn’t.

There is an important lesson that we can all learn from this.

We need to be vigilant against sensationalism, melodrama and those who like to over egg the puddling. That applies to both journalists and brokers, alike. It is easy to fall under their spell of over exaggeration.

The Dow Jones Industrial Index has fallen by more than 600 points on nine separate occasions since 1987. The worst drubbing was not after Brexit. Far from it.

The most severe drop happened in 2008, when the index fell 733 points or 7.8% in the autumn of that year.

Markets recover

At the time, the most-watched US index hovered around 10,000 points. Today it is some 80% higher. So, it is important to beware of overreacting to recent events.

There are lots of things we know, we know. There are lots of things we know, we don’t know. Then there are also things we don’t know, we don’t know.

Warren Buffett once said: “The future is never clear. You pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term value.

He’s right. So never be afraid of stock market declines. Welcome them with open arms. Look for wonderful companies.

Wonderful companies are wonderful because they have a way of coping with whatever is thrown at them.

Look into the reasons why companies such as Singtel (SGX: Z74) and Singapore Exchange (SGX: S68) in Singapore are successful. Delve into why Nestle (Malaysia) Berhad (KLSE: 4707; KLSE: NESTLE) and Carlsberg Brewery Malaysia Berhad (KLSE: 2836; KLSE: CARLSBG) stay ahead of the competition.

Our job as investors is to always identify the good companies from those that are not so good.

A stock market decline can be just the opportunity we need to buy those wonderful companies at attractive prices. I always do, and so should you.

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. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.