The Stock Market’s “Bloodbath”: Keeping The Right Perspective

“Dow Jones suffers worst day in six years as global markets plunge”

— a scary news headline

We are greeted today by the news that the Dow Jones Industrial Average had suffered its worst ever one-day points fall last night.

At the lowest point, the DJIA was down almost 1,600 points from where it was last Friday. It eventually closed with a fall of 1,200 points. The DJIA’s fall came after it had already declined by near-700 points last Friday. As we speak, worldwide markets are falling along with the DJIA, with our own Straits Times Index (SGX: ^STI) down by around 3% at the time of writing.  

The plunge sounds terrible. All 30 stocks in the STI today are in the red. The words “bloodbath” and “sea of red” seem apt when used to describe the scene that is unfolding in front of our eyes.

But we are also not in a correction yet. Let me explain.

Keeping it in perspective  

The table below summarises the current levels of the Straits Times Index, along with the three major US indexes – namely the DJIA, the S&P 500, and the NASDAQ Composite  compared to their respective 52-week highs.

Source: Google Finance and Yahoo Finance

A correction is often defined as a fall of 10% or more. As you can see from the above, we are not quite there yet.

To put things into perspective, the Straits Times Index is at the same level now as where it was in November 2017, or a mere three months ago. Now, I am pretty sure there wasn’t anyone using the words “bloodbath” to describe last November’s stock market.

Winning the Investing Game

“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

— Warren Buffett

Imagine that you went to watch a football match in a packed stadium. And imagine that everyone was looking at the scoreboard rather than the match on the field.

That would be pretty odd, wouldn’t it?

But that’s kinda what is happening now. If investors keep their eyes glued to stock prices (the scoreboard), they are likely to miss the business developments that are happening within the companies (the football match itself). And as we all know, what happens on the field will eventually turn up on the scoreboard.

Likewise, we expect good business performances to result in higher stock prices over the long term.

It’s not to say that this approach is easy to swallow. Your portfolio is tied to stock prices in the meantime, and the plunge will hurt in the short term. But I submit that the best course of action is to keep our eyes on businesses, rather than on the movements of stock prices.

If we can choose the right businesses to own, today’s lower stock prices should be welcomed, rather than shunned. Or as our ex-Foolish colleague Morgan Housel once said:

At the Motley Fool, we choose the latter. We’re in it for the long-term.  

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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 writer Chin Hui Leong doesn’t own shares in any companies mentioned.