Commentary

Never look back when investing

Focus on the future of your investments and do not be swayed by what you paid for them

There is certainly no shortage of bad news to keep even the most battle-hardened investor awake at night. If it's not one thing, then it is another. No sooner have we recovered from the shock devaluation of the Chinese yuan and a potential interest rate rise in the United States, than we have to contend with an economic slowdown in many parts of Asia, driven primarily by China's need to quickly rebalance its economy.

But as hard as it may be for many investors to accept, market falls can be a boon rather than a bane. After all, if we are truly long-term buyers of shares, then we want stock prices to drop once in a while, just so we can buy them cheaply. But we need to learn to be greedy when the market is fearful and to be fearful when the market is greedy.

Both fear and greed are unquestionably powerful emotions. They can be greatly amplified when mixed with a hefty dose of "recent-event syndrome". This is where something is considered to be vitally important, simply because it is the most recent thing that has happened. Consequently, when we see the price of our investments fall, it is very easy to convince ourselves that, somehow, the decline must be due to something that has happened recently - even if the drop and the recent events might be completely unconnected. Even if we don't make the connection ourselves, there will be no shortage of experts who will try to connect the imaginary dots for us.

But while Warren Buffett's sage words about fear and greed make perfect sense in theory, it is never that easy to eradicate emotions when we invest. This is partly because of our in-built fixation on the price that we have paid for our investments. However, it is crucial to remember that the price we have paid for a stock matters to nobody other than ourselves.

One way to overcome the difficulty of letting emotions get in the way of logic is to ignore entirely the price we have paid for a share. Instead, focus on other attributes such as the dividend forecast, the prospective earnings and the net asset value. In other words, think only of the present and the future. That is what almost everyone else in the market will be doing, apart from you. They will be looking ahead, rather than back to the past.

One way to overcome the difficulty of letting emotions get in the way of logic is to ignore entirely the price we have paid for a share. Instead, focus on other attributes such as the dividend forecast, the prospective earnings and the net asset value. In other words, think only of the present and the future.

Consider, for instance, how many brokers have jumped on the bandwagon to cast a shadow over the real estate investment trusts (Reits). Some of their gloomy forecasts could be right, of course. For example, the hospitality sector has been hurt by a myriad of external factors. But not all Reits have been similarly affected. Some have even increased their distributions to shareholders. So be careful about tarring every company with the same brush.

If you own a Reit and its share price has fallen, but the payout has not, then that could be a good indicator that someone has got his sums very badly wrong.

It is worth repeating that the price you have paid for a share is irrelevant. It is what is commonly known as a "sunk cost". What matters, instead, is how much the investment is worth now. If it is significantly overvalued today, then you might consider selling it. However, if the shares are seriously undervalued, then it could be worth considering buying more. Importantly, whether the shares in our portfolios are in the red or in the black should not have any bearing on our decision to buy or sell.

Currently, Singapore shares, which are valued at around

13 times of earnings, do not look expensive. It implies that we, investors, are paying $13 for every dollar of profit that Singapore companies make. It also means that if, theoretically, Singapore companies pay out all of their profits as dividends, it would equate to a dividend yield of 7.7 per cent. By almost any measure, that is not expensive. For example, Singapore 10-year bonds currently yield around 2.5 per cent. Our market is also less expensive than the US market, the British market and the Tokyo market.

With low valuations, the local stock market should be an automatic choice for many of us to invest our money. But a constant fear of recent events and an anchor on prices of the past could be holding us back.

So, ignore recent events.

Ignore the price you once paid for a stock and start to look forward rather than back.

As investment guru Peter Lynch once said: "You can't see the future through the rear-view mirror."

  • This is a regular monthly column on stocks and investing by Mr David Kuo, chief executive officer of The Motley Fool Singapore.
A version of this article appeared in the print edition of The Straits Times on November 09, 2015, with the headline 'Never look back when investing'. Print Edition | Subscribe