Making decisions is part of life.
Some major life decisions include choosing a course to take in university or whether or not you should make a mid-career switch.
As humans, we tend to question our own decisions even after we’ve made them.
When it comes to investing, the same situation arises.
As you are deciding which stock to buy, that decision is surrounded by uncertainty as many things could happen that can affect the stock you own.
Here’s the thing investors have to understand.
At its core, investing is an exercise in probability.
The only thing that you can be certain of is that there will be uncertainty when you buy any stock.
Yet, as humans, we often seek validation that we made the right choice.
Here’s the rub.
What we cannot eliminate is the randomness of the world translating into bad news for our stocks.
The most visible sign
When faced with uncertainty, many investors turn to the most visible sign of validation – share prices.
Why is that so?
Share prices are on full display every day and can be accessed with just a click of a button on your mobile phone.
Simply said, it’s easy to assess.
When your money is on the line, rising share prices provide a strange comfort amid the uncertainty.
If share prices are higher than your original buy price, you get a sense of validation that your decision is right.
Looking beneath the hood
However, rising share prices are not always a positive signal that the business is doing well, especially in the short run.
If that is the case, what drives share prices in the long run?
Frankly, this is a question you should be able to answer before you start investing.
So, if you answered “well, it’s the business”, then you’re spot on!
AsWarren Buffett once quipped – if the business does well, the stock price will eventually follow.
Rather than seeking validation from a rising share price, you should, instead, turn your attention to how the business is performing.
Being fixated on stock prices jumping up and down is akin to watching the scoreboard of a soccer match.
It’s the quality of the 22 players on the field that determines the eventual score, so your eyes should focus on the playing field instead of the score.
Growing businesses, growing share prices
If you want some evidence that growing businesses lead to higher share prices, look no further than blue-chip bank DBS Group (SGX: D05).
Singapore’s largest bank recently reported its highest-ever net profit of S$2.2 billion for 2022’s third quarter (3Q2022).
And what did its share price do?
Over the last decade, DBS’ share price has more than doubled from S$14.72 to the current S$34.55
Supermarket operator Sheng Siong (SGX: OV8) has also grown its business by leaps and bounds.
The group has doubled its store count from 33 in 2013 to 66 as of 3Q2022.
Along the way, net profit has more than tripled from S$41.7 million in fiscal 2012 (FY2012) to S$132.8 million in FY2021.
What happens to its share price when the underlying business does well?
You already know the answer.
The supermarket operator’s share price has nearly tripled from S$0.64 a decade ago to the current S$1.65.
Even better, as the business grows, the dividends that it pays can grow in tandem.
Going back to DBS, the local bank paid out a total of S$0.56 per share in dividends back in 2012.
Fast forward to today, and its trailing 12-month dividend has nearly tripled to S$1.44.
Get Smart: Look at the business, not the share price
It bears repeating.
As the business grows over time, its share price and dividends will increase alongside.
Also, if you choose to focus on the share price, you will be subject to the whims of the day-to-day stock market volatility.
As long as the business fundamentals remain solid, and the company’s future looks bright, your returns as a part business owner will naturally rise over time.
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Disclaimer: Royston Yang owns shares of DBS Group.