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How To Capitalise On Market Falls

I was stuck in a traffic jam in the back of a taxi the other day.

It’s not exactly the end of the world when something like that happens. Traffic snarl-ups do occur occasionally in Singapore, which is why we should always allow plenty of time to get to where we want to go.

It is call building in a “margin of safety”. But that’s a topic for another Take Stock Singapore.

No stones unturned

Nevertheless, my cab driver was very apologetic.

He went into great detail why the snarl-up happened. I doubt if he had any idea of the exact cause, though.

But that didn’t stop him from blaming poor driving in Singapore and the lack of courteous motorists. He even took a swipe at the pointlessness of the Certificate of Origin.

No stone was left unturned.

That got me thinking.

We humans are always curious to know why something has happened. And if we can’t, then we are more than happy to make up a reason – any reason – that could seem plausible enough.

It happens in investing all the time.

Market mayhem

I remember one Friday not that long ago, the US market fell almost 400 points. At first, the drop was blamed on North Korea’s powerful nuclear test. That was, kind of, believable. It was a bit flaky but, nevertheless, probable.

Then the reason for Friday’s drop shifted to talk that the US Federal Reserve could raise interest rates. If the first reason was flaky then the second is bordering on worrying.

Here’s why.

If professional investors are that concerned about a quarter point hike in US interest rates, then they are either totally unprepared or wholly inept – neither of which fills me with confidence.

Where on earth have these people been investing their (our) money? Why should they be so badly shaken by a tiny increase in US interest rates? Wherever it might be, I certainly don’t want to be a part of it.

The dog’s tail

When we invest, we should consider carefully how our chosen assets could reward us over the lifetime of the asset.

Over that protracted period, interest rates could go up, go down or even stay the same. But we should never allow a central bank’s interest-rate tail to wag our investing pedigree dog.

We should invest in companies that can meet interest payments, comfortably. Better still, we should look for companies that don’t borrow money at all. If a company doesn’t have any debts, then it can’t possibly go bust.

We should also invest in companies that have the ability to withstand just about any economic upheaval. These companies have pricing power.

Our job as investors is to go out and look for these exemplary businesses.

Throwing out the baby

When markets fall – as they did that Friday – just remember that it was because there were more sellers than buyers. It’s really that simple.

Why they threw the baby out with the bathwater is not that important. But why we bought a share is important.

If we had bought a stock for non-value reasons, then we are more likely to sell it for non-value reasons too.

But if we understand why we had bought a share, and if the share-price drop allows us to buy more of what we like at a better price, then instead of following the herd we should go against the crowd.

That is not being contrarian for contrarian sake. That is just common sense, which is something that the market often lacks. It is something that we can count on and capitalise on.

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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.