Every once in a while the market likes to test our resolve as long-term investors.
Some of us fail the test abysmally. But some of us pass with flying colours. Here’s why.
Consider, for instance, a visit to your favourite fish ball noodle stall.
For as long as you can remember, your ever-reliable hawker has always served four fish balls with every portion of your favourite lunchtime fare.
Then there were five
But one afternoon he gives you five fish balls. You feel pretty chuffed with the 25% extra that you got in your bowl. That is…
…until you discover that your friend, who joined the queue after you, was given six fish balls.
All of a sudden, your extra fish ball doesn’t seem that great anymore. You now wish that you had waited and got 50% more.
Of course there were never any guarantees that you would get anything extra at all. You could have ended up with no bonus fish balls in your bowl.
The same goes for investing.
When stock markets fall, we should work out if the drop would give us the opportunity to buy more of the shares we like at a better price.
If it does, then we should consider snapping up those extra “fish balls” as quickly as we can.
Peter Lynch once said: “When favourable cards turn up, add to your bet, and vice versa”.
Warren Buffett said something very similar: “Excellent investment opportunities come about when superior businesses experience a one-time event that depresses the stock price in relation to their intrinsic values.”
So what exactly are these “one-time” events?
We experienced one of them not that long ago. The market reacted very badly when it realised that Britain would leave the European Union.
Exactly why the market behaved the way it did is unclear. But it would seem that as soon as one investor shouted “FIRE”, others headed for the doors too.
These things can happen in the market. If people had bought shares without understanding why they bought them in the first place, then they will sell them without knowing why too. What a pity.
But it does provide an opportunity for investors who have considered their purchases carefully to add to their investments at more favourable prices.
In other words, if we are happy to get that one extra fish ball, then we should be satisfied. If the market should continue to fall, we could always buy more, if we want.
What should we be buying?
For me, it is obvious. The best stocks to buy are the ones that I already own. The same could apply to you.
These are the companies that we should have researched carefully and the shares that we are happy to keep in our portfolios for the long term.
A stock market downturn provides just the opportunity for us to buy more of the shares we like at good prices.
Many investors, however, feel better when, say, the Straits Times Index (SGX: ^STI) soars 100 points and stocks are overvalued. But they feel terrible if the market falls 100 points and the market is awash with bargains.
But if you aren’t confident buying when the market slumps, and you can only think of selling when they fall, then it is unlikely that you will never make a decent profit from investing.
That’s because you are buying and selling your shares at exactly the wrong time.
Time and again, investors will blame the market when things go wrong. But stock markets and companies don’t determine our fate. It is how we behave when the market tests our resolve that counts.
So will the stock market fall again?
If you are a true long-term investor, then like me, you will certainly want it to.
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.
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.