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How To Outrun A Bear

It was not long after Diwali was over when Singapore started getting ready for the next major festive event – Christmas.

I sometimes wonder why we can’t celebrate Diwali just that little bit longer.

Diwali, or the Festival of Light, for me is a reminder of the victory of light over darkness. It’s about the triumph of knowledge over ignorance. It is also about appreciating and understanding what is going on around us.

What’s volatility?

It was around the time of Diwali when I was asked by the morning crew on MoneyFM why Genting Singapore (SGX: G13), City Developments (SGX: C09) and Venture Corp (SGX: V03) were the three worst performers in the Straits Times Index (SGX: ^STI) in October.

Point is, I don’t think anyone really knows.

But what I do know is that October certainly lived up to its reputation as a volatile month for shares. Actually, stock markets could have gone either way – they could have ended the month deep in the red, which they did, or firmly in the green, which they certainly didn’t.

That is what happens with volatility. As it turned out, it was a very Red October.

Thing with volatility is that we deem it to be bad if shares fall. But we think it’s fabulous if the stock market rises. We can’t have it both ways….

….. we can’t vilify volatility if stock markets fall but praise it if shares rise.

Take your pick

In fact, during Red October, any one of the 30 companies that comprise the benchmark index could have ended up at bottom of the heap. It just so happened that the market decided to pick on those three.

That reminds me of a story I was told when I was a young boy. It was about two lads who were chased up a tree by a grizzly bear….

…. After a couple of hours, one boy turned to the other and suggested that they should make a run for it. The other boy pointed out that they could never outrun a bear….

…. the first boy then said he didn’t need to outrun the bear, he just had to outrun his friend. So, much for friends, eh!

The good and bad

Point is, the three biggest fallers in the Straits Times Index were just unfortunate to be caught in the crosshairs of seller. Volatility doesn’t discriminate. Good shares can be dragged down just as easily as bad ones.

But informed investors know the difference between good companies and bad ones. And when markets behave erratically – as they did in October – it can be a good time to buy.

Good companies, we need to remember, don’t turn into bad companies just because their shares have been sold off in the market….

…. Warren Buffett said: “We should only buy something if we would be happy to hold it, if the market shuts down for 10 years.”

Guiding light

That has been my guiding light. It should be yours too.

We should only buy a share if we are confident about its long-term prospects. We should only commit our money, if we can estimate how that share could reward us over the long term.

I am fortunate to have seen the benefits of income investing a long time ago. As such the stock market has been good place for me to park my money. In the short term, I get to fill my boots with dividends….

…. and in the long term, the shares of those companies that I own should grow and appreciate in price.

Something stupid

For me, investing means never being fixated about whether share prices will be higher or lower in the short term. It’s about buying wonderful companies at fair prices, then sitting back to enjoy the dividends, as they roll in.

And if the dividends grow over time, then so too could the share price. That is what I call the beauty of long-term dividend investing.

So, spend time looking for wonderful companies, then wait to buy them when prices look fair. You can always count on the market to do something stupid….

…. You just don’t know when it will happen. But Red October was one of those times. It was a great buying opportunity, and it will happen again.

A version of this article first appeared in Take Stock Singapore.

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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.