It’s natural to feel worried when things turn south.
In the last 18 months, we have seen our fair share of ups and downs in the stock market.
Last year’s downturn has impacted a wide swath of companies, but some have remained nimble and adapted to the challenges.
Meanwhile, others have ridden on new trends and habits to post growth despite the tough economy.
Changes in the business cycle and disruptions to supply chains have resulted in a wildly volatile stock market.
Investors who were whipsawed by the share price volatility may feel discouraged and nervous.
We offer three suggestions on how you can safely navigate the stock market.
Focus on the business, not stock price
Remember that behind every stock ticker is a business that supplies goods and services.
Although share prices appear to be just a bunch of numbers blinking up and down by the minute, these prices are ultimately tethered to the health of the underlying business.
In other words, there has to be some fundamental method to derive the intrinsic value of a company.
Investors do themselves a favour by focusing on how the business is performing, rather than tracking its share price.
The share price doesn’t tell you anything about the business, after all.
If the company is performing well despite the challenges, then its share price should also rise in tandem.
By shifting your attention to what matters, that is the financial and operating numbers of the business, you can then safely tune out the noise and become a Smarter Investor.
Accept that even great companies encounter obstacles
Growth does not occur in a straight line.
Even the best companies in the world have encountered stumbling blocks that impeded their growth temporarily.
Take Apple (NASDAQ: AAPL) for example.
The iPhone maker is worth US$2.1 trillion today, but it was on the verge of going bust back in 1997.
In fact, it was its rival, Microsoft (NASDAQ: MSFT), that swooped in with US$150 million and saved it from insolvency.
Steve Jobs, the visionary who invented the iPhone, also joined back the company he co-founded that same year after leaving in 1985.
And the rest, as they say, is history.
The above example shows that most great companies have experienced moments in their history where all seemed lost.
By applying this analogy to the current pandemic, it’s therefore natural for even strong, well-capitalised businesses to face financial stress.
Boustead Projects Limited (SGX: AVM), a leading industrial real estate specialist, has reported that the pandemic resulted in the closure of project sites, elevated compliance costs and lower productivity.
Despite the challenges, the group managed to successfully launch its Boustead Industrial Fund during the fiscal year ended 31 March 2021.
As part of the deal, the company was able to record a one-off transaction gain of S$134.8 million while also establishing a platform for future divestments of completed and stabilised income-generating properties.
Boustead Projects shows that despite tough times, the group still managed to turn the situation around using an innovative method – the creation of a private fund.
Things will (eventually) get better
The rock singer Bon Jovi has a song titled “Keep the Faith”.
And that’s exactly what investors should do when faced with a seemingly intractable situation.
If the reason for buying a stake in a great business still stands, this means that your investment thesis remains valid.
Keeping the faith means knowing that things will eventually get better when tough times pass.
Take DBS Group (SGX: D05) for instance.
The lender found itself having to make massive provisions for potential bad loans when the pandemic first broke out in March last year.
For the first quarter of 2020, pre-emptive allowances totalling S$1.1 billion were booked in anticipation of a deep and protracted recession.
Investors should remember, though, that DBS has a storied track record and a strong franchise.
Coupled with a strong balance sheet and sufficient liquidity, the bank was able to weather through the year and emerge stronger.
Fast forward to today, and DBS has, in its latest fiscal quarter, written back S$190 million of its provisions while still maintaining a strong core of reserves above the regulator’s requirements.
DBS’ example demonstrates that strong, blue-chip companies can tide over rough times and emerge unscathed.
The key, of course, is to select companies that display such resilience so that you, the investor, can sleep well at night.
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Disclaimer: Royston Yang owns shares of DBS Group, Apple and Boustead Projects.