Our Most Powerful Investing Weapon

It is the rainy season in Singapore. And don’t we know it.

One minute our tiny island could be bathed in sunshine. But at the drop of a hat the heavens could open up.

It is unfathomable, though, just how unprepared some of us are for the northeast monsoon. We know it occurs between November and March. And yet many of us are still caught on the hop when it happens.

Wouldn’t it be better to, at least, carry an umbrella in our bags when we go out? That way we can still go about our daily chores, even if it is raining cats and dogs.

There are some interesting similarities with investing.

Are you ready?

We know that market turbulence is just around the corner. For instance, interest rates in the US are set to rise.

The market expects the US Federal Reserve to hike interest rates this month, regardless of what the Non-farm Payroll or unemployment figures might suggest.

The closely-watched economic numbers used to give the Fed a convenient excuse to keep interest rates on hold. It has managed to dodge the bullet, since the start of the year.

But not anymore – a new President at the Whitehouse has changed everything.

No more excuses

Bond traders now reckon that a rate-hike in December is a dead-cert. They believe that there is a 100% chance that the Fed will raise rates this time around.

There are some who suggest that 10-year Treasury could even climb to 3% before too long. That could mean two rate hikes in 2017.

A rise in interest rates should not have come as a massive surprise to any of us. Did anyone really believe that the cost of borrowing would stay low, forever?

Unfortunately some did. Some still do.

It doesn’t matter

But for long-term investors it shouldn’t matter a jot what the Fed decides to do. The old rules of investing still apply.

Investing has always been about working out how an asset could reward us over the long haul. In other words, it is the yield on the asset over the lifetime of the asset that counts.

Many happy returns

If you are a growth investor, then focus on the things that matter to your growth companies. That means monitoring the earnings of the company. They should ideally be rising over time.

Keep an eye on the returns that the company can generate on every dollar that you have invested in it. The Return on Equity can tell us lots about the performance of the business.

Also make sure that the company is not taking on too much debt. Every dollar that is paid out in interest is a dollar that is not going into your pockets as a shareholder.

If you are an income investor, then focus on the things that matter to your income-generating companies. That means making sure that the company is able to pay rising dividends.

Keep an eye on where the dividends are coming from. The payout ratio can tell you lots about whether the dividends are sustainable.

Look ahead

As we enter a period of turbulence for global markets, try to keep an eye on the future rather than the present.

There could be periods – sometimes long periods – when a particular style of investing could fall out of favour. That doesn’t mean that we are wrong and the market is right.

Instead, take advantage of market uncertainty. Some people might call it market timing. It isn’t.

Market ignorance

Instead it is capitalising on market ignorance, which is one of the most powerful weapons that we, as private investors, have in our armoury.

We should never be in the business of second-guessing the direction of markets. That is a mug’s game.

So don’t stray from your guidelines.

In the short term there is no correlation between the share-price performance and the performance of a business. But in the long term there is.

You want to be a share owner when that happens.

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.