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How to Get Rich by Ignoring the Market

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The Motley Fool Singapore

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In this “get rich quick” economy, there are very few more misguided things than staring at a screen full of numbers and lines and hoping to be able to guess when you can make a quick buck or two. While we’re not saying that people haven’t made some money from trying to time the market, The Motley Fool gives us a different perspective on doing things the completely opposite way:

In the hustle and bustle of the investing world, it’s easy to lose perspective on the big picture. But even though it runs counter to everything that advancing technology and information at your fingertips provides, there’s a simple way you can get back to basics.

Instead of obsessing over your portfolio every minute of the day, turn off the stock tracker and start checking your stocks’ prices only every once in a while.

 

Disconnecting From Distraction

In this day of smartphones and computers, that is easier said than done. There’s something hypnotic about watching stock prices rock gently back and forth during the trading day, occasionally soaring way up high or make stomach-churning free falls.

The biggest threat to investing success, however, is emotion. When you’re constantly looking at how stock prices move, it’s easy to jump to emotional conclusions. When a stock drops $1 for no apparent reason, you might feel like someone knows something bad is coming, and want to sell. When a stock jumps suddenly, you’ll feel tempted to buy, sure that you’re about to miss the boat on a big bull run. But when the heat of the moment passes and you can think about the stock rationally, you realize just how ridiculous those emotions can be.

In fact, some of the world’s greatest investors have taken the view that day-to-day fluctuations mean absolutely nothing. Warren Buffett, for instance, has argued that you should buy stocks that you’d be comfortable holding if the stock market were closed for five years after you bought them. Similarly, here at The Motley Fool Singapore, we also agree that any money you need in the next five years should not belong in the stock market.

 

Get a Smoother Ride

Tuning out unnecessary noise helps you focus on the fundamentals of the investments you make. That can prevent some unfortunate mistakes.

Here’s an example: Say your portfolio consisted of five different shares and that you’ll check their prices on a single day of the year, 9 Dec 2013. You’d be quite happy to find that your portfolio had gained 80% since you bought those shares in equal amounts at the start of 2007.

But, if you had checked the prices of your shares on 9 Dec 2008, you might have had cold feet since your portfolio would have been slashed by 27%.

Those five shares were the big blue chips, Singapore Exchange (SGX: S68), Jardine Matheson Holdings (SGX: J36), Starhub (SGX: CC3), Jardine Cycle & Carriage (SGX: C07), and Sembcorp Industries (SGX: U96).

And while they might not always be synonymous with the term “volatile shares”, an emotional investor might still have lost his/her nerve and sold off the shares to “cut losses” when the market came crashing.

Company 2 Jan 2007 9 Dec 2008 Change from 2007 9 Dec 2013 Change from 2007
SGX S$5.70 S$5.08 -10.9% S$7.09 24.4%
JMH US$21.40 US$16.38 -23.5% US$51.79 142%
Starhub S$2.64 S$1.94 -26.2% S$4.18 58.9%
Jardine C&C S$14.80 S$9.99 -32.5% S$34.50 133%
Sembcorp Industries S$3.84 S$2.18 -43.2% S$5.27 37.2%
Average -27% 79%

Source: S&P Capital IQ

 

Stay Awake

That’s not to say that you should ignore everything about the stocks you own. It’s essential to keep up to date about the fundamentals behind the businesses. You can do this by regularly monitoring financial results and paying attention to news items that could have an impact on a company’s core business.

What staying in the dark about share price does is force you to make your own assessments about changes in the condition of the companies whose shares you own.

For instance, late last year, short-seller Muddy Waters targeted commodities trader Olam International (SGX:O32) by highlighting weaknesses in its business. The allegations might have worried some investors about its business.

On the other hand, others might have seen it as an opportunity to buy into the business as they conclude that the support of Temasek Holdings would be a strong indicator. Regardless of which camp you fall into, it is important to make your own assessment of the business fundamentals.

 

Find The Sweet Spot

Worrying and fretting while doing nothing about it is never the right move, especially when things are going badly. Having the right information to make an informed decision is critical. The question, though, is this: When do you have so much information that it stops adding value to your decision-making process?

If you figure out what information has real value to you and tune out the rest, you’ll find yourself much more focused on finding the best stocks for your portfolio.

 

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The Motley Fool Singapore

The Motley Fool (www.fool.sg) offers stock market and investing advice, showing people how to take control of their money and make better financial decisions. We also host a range of educational content, written for everyday people. We feel that the best person to make your financial decisions is you, and we want to help you take control of your own money.