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Should You Fight Or Take Flight?

The English language is full of nuances. Have you ever heard people say that they are afraid, when they are not afraid at all?

For example, sometimes a friend might ask you to help them out with something. But you are too busy. The often-heard response is “I’m afraid I can’t at the moment.” But why should you be afraid?

Mind you, there are times when there may be good reasons to be scared.

Only natural

It is only natural to be afraid. It’s called survival.

To stay alive, we can either stand our ground and fight or we can turn and take flight in the face of danger.

Those are the two choices we have when we are afraid. We face those same two choices when we invest.

Some people choose to take flight in the face of market uncertainty. It might seem sensible at the time.

Jump for cover

Consider, for instance, the number of people who jumped for cover last year by buying the Chinese yuan after the leaders of America and North Korea started rattling their sabres.

The advice at the time was buy the Chinese currency. It was seen as a safe haven in times of conflict.

But since when has the renminbi been a haven?

Are we talking about the tightly-controlled currency that is massaged every day by the People’s Bank of China? The central bank sets the daily reference rate rather than let the market determine its proper value.

No exit

There are also restrictions on the yuan’s movement. Chinese and non-Chinese citizens are forbidden to take more than the equivalent of US$50,000 out of the country.

So why should it be a safe haven?

A safe-haven currency should let investors move their money freely. Admittedly the currency could fluctuate. But that is the feature of a freely-traded currency.

Crypto-mess 

What about investors who have piled into cryptocurrencies. It is understandable why some investors may be concerned about fiat currencies.

Many central banks have hardly covered themselves in glory, when they flooded the global economy with fresh cash.

But can currencies that are mined through computer algorithms really be the answer? It is true that cryptocurrencies, such as bitcoins, have had a good run.

However, its value is based on a readiness by some people to attribute a value to something that has little or no value beyond what they are prepared to pay for it.

Wealth evaporation

Fear is a natural response to impending danger. And as global markets have climbed ever higher last year, it is understandable why some investors have become ever more concerned.

After all, none of us would want to see our wealth evaporate overnight.

But here’s the thing….

…. when we buy shares, we need to know why we have bought them in the first place.

Where’s your crayon?

If we invest in a consumer-goods company, then we need to know as much about it as possible. We should find out about its products, its competitors and who its customers are.

Peter Lynch once said: “We should be able to describe a company using just a crayon.” That’s before we even start looking at its finances and management capabilities.

We should be comfortable with the business. We should be comfortable with its valuation. We should be comfortable with its prospects.

If we are, then we should be comfortable holding its shares through both the good and the bad times in the market.

Simples

There could be moments when the shares might fall. They might even fall below the price that we bought them at. That doesn’t mean we are wrong. Nor does it make it a bad investment.

The market at any point in time is made up of people who know what they are doing and those who don’t.

To succeed in investing, we need to know what we are buying and why we are buying them. It is really that simple.

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.