There is to plenty worry about in the world today.
Concerns over rising interest rates from last year have spilt over into this year. Earlier in January, the US imposed a hefty tariff on imported solar panels, mostly aimed at Chinese manufacturers. What followed was a series of tit-for-tat tariffs between the US and China which has since escalated into an all-out trade war. Closer to home, the Singapore government imposed a new round of property cooling measures in July that sent share prices of property developer stocks crashing.
The sum of all these worries appears to be reflected in Singapore’s Straits Times Index (SGX:STI). The index started 2018 at around 3,490, briefly rising above the 3,570 mark before heading head first to under 3,300 today.
If we had to capture all the above in one word, it would be “uncertainty”.
Finding Your Touchstone
For many investors, these are trying times.
The STI is down over 6% for the year. Some individual stocks are down even more. No investor enjoys looking at their portfolio when it is in the red. After all, it’s our hard-earned money at stake and the pain of loss can feel unbearable. The situation becomes harder to bear with an uncertain economic environment. At its worst, our emotions can drive us to sell stocks out of fear of more losses.
This feeling of dread is not uncommon.
Yet, as investors, we have to find the courage to focus on the things that truly matter. With that in mind, I would like to share three principles that have served me well over my investing career.
1. Buy businesses, not tickers
When we buy shares, we are buying a stake in a living, breathing business.
The maxim above sounds simple enough, but from what I have observed, it is frequently forgotten in practice. Often times, the sight of stock prices declining is enough to throw off the common investor from focusing on the business behind the ticker. It is at this exact moment when we should remember that what we have bought is not a stock ticker, but a stake in a business.
With that in mind, I submit that our best move to cut through the noise of an uncertain stock market is to continue studying the business behind the ticker. If you want to know which stock will do well, take your cues from the business, not the movement of the stock price.
2. Price is What You Pay, Value is What You Get
For this principle, I would like to recount an investment talk by Professor Aswath Damodaran that I attended. As a professor from the Stern School of Business in New York University, he is a well-regarded voice on the subject of valuation, corporate finance, and investment management.
In this session, Damodaran pulled out an envelope and put a $10 note in it.
Upon closing the envelope, he asked the audience how much they would pay for the envelope. The response from the audience was swift — no one would pay anything close to $10 for the contents of the envelope. Intuitively, the crowd understood the value ($10) inside the envelope and adjusted their bids accordingly (a lot less than $10). The professor didn’t have to teach the audience what to bid.
Unfortunately, the same cannot be said about participants in the stock market. All too often, when stock prices fall, investors are too quick to conclude that something bad has happened to the business (and vice versa).
But if we followed Damodaran’s lesson, we would understand that the value of a business and its stock price do not always match. Investment opportunities appear when the value of a business and its stock price is out of sync.
It follows that our job as investors is to figure out which businesses are undervalued.
3. Invest for the long-term
Friend: “What’s your opinion on this penny stock? It looks cheap”
Me: “Hey, have you considered investing in the company that you work at?”
Friend: “Nah, my company shares are very slow”
I wouldn’t mention the company name to protect my friend’s identity.
But at the time of our conversation, I took the effort to look at the performance of the company where he was employed. To my surprise, I found out that his company’s shares had risen by more than 10-fold over the last 10 years. So, why did my friend say – in his own words – that his company shares were slow?
The difference, in my mind, was the timeframe that we were looking at.
When measured in days or months, it would appear to my friend that the stock price of his company had barely budged. But when we start lengthening our time horizons, the returns turn out to be quite sweet.
Again, when we buy a stock, we are buying a stake in a business. And if we behave like a business owner, we should exercise patience for its operations to produce results. After all, there is only so much that a good business can do in three months. But a good business can achieve more if we give it three years or more.
How to use these 3 tips to invest
I’ll be honest … none of the above is easy to apply.
When your money is on the hook, you may end up making hasty decisions that hurt your portfolio.
Even seasoned investors like Warren Buffett can be swayed by emotions.
What’s more, it takes time and effort to dig deep into the business behind the stock.
And that’s not what some investors want to do …
Which is why we built Stock Advisor Singapore. It’s designed to help you invest better in the stock market. We removed the hard work (and heartache!) for you.
Every month, you get 1 stock recommendation from us. These stocks are backed by weeks of rigorous research based on the 3 principles I wrote about.
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A version of this article first appeared in the 5 October 2018 edition of Take Stock Singapore.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore writer Chin Hui Leong does not own any of the stocks mentioned.