Commentary

Don't let fear rule how you invest

Success in the market rests instead on knowing more about one's investments

What do we have to be afraid of?

The English language is full of nuances. Have you heard people say that they are afraid, when they are really not afraid at all?

For example, sometimes a friend might ask you to help him with something. But you are too busy. The often-heard response is: "I'm afraid I can't at the moment."

But why should you be afraid?

Mind you, there are times when there may be genuine reasons to be scared. And fear can do some strange things to us. It can cloud our judgment. It can prompt us to do things that we might not otherwise do. It can cause us to attend to things that are unimportant rather than focus on more crucial issues. It can lead us to dwell unnecessarily on recent events rather than think about the long-term impact.

It is only natural to be afraid. It's called survival.

To stay alive, we can either stand our ground and fight or we can turn and take flight in the face of danger. Some people choose the latter. It can, sometimes, be prudent to do so. Fight or flight are the two choices we face when we are afraid.

We face those same two choices when we invest. Some people choose to take flight in the face of market uncertainty.

It might seem sensible at the time. Consider, for instance, the number of people who jumped for cover by buying the Chinese yuan after the leaders of the United States and North Korea started rattling their sabres.

The advice at the time was to buy the Chinese currency. It was seen as a safe haven in times of conflict.

But since when has the yuan been a safe haven? Are we talking about the tightly controlled currency that is massaged every day by the People's Bank of China?

The central bank sets the daily reference rate rather than let the market determine its proper value.

There are also restrictions on its movement. Citizens are forbidden to take more than the equivalent of US$50,000 (S$68,200) out of the country.

So why is it a safe haven? A safe-haven currency should let investors move their money freely.

Admittedly, the currency could fluctuate. But that is the feature of a freely traded currency.

What about investors who have piled into cryptocurrencies? It is understandable why some investors may be concerned about fiat currencies. Many central banks hardly covered themselves in glory when they flooded the global economy with fresh cash.

But can currencies that are mined through computer algorithms really be a safe haven? It is true that cryptocurrencies, such as bitcoin, have risen significantly in value. However, a cryptocurrency's value is based on a readiness by some people to attribute a value to something that has little or no value beyond what they are prepared to pay for it.

Some investors believe that bonds can be a safe haven. Demand for German bonds pushed the borrowing costs to their lowest levels in months. In fact, they were prepared to pay money to lend Germany money for two years. They were willing to accept a negative return on two-year German bonds because they were deemed to be a safe place. Crazy.

Fear is a natural response to impending danger. And as global markets climb ever higher, it is understandable why some investors have become ever more fearful. After all, none of us would want to see our wealth evaporate overnight.

But here's the thing. When we buy shares, we need to know why we have bought them in the first place. If we invest in a consumer-goods company, then we need to know as much about it as possible. We should find out about its products, its competitors and who its customers are.

Renowned fund manager Peter Lynch once said: "Never invest in any idea you can't illustrate with a crayon."

That's before we even start looking at its finances and management capabilities. We should be comfortable with the business. We should be comfortable with its valuation. We should be comfortable with its prospects.


Mr David Kuo, chief executive officer of The Motley Fool Singapore. PHOTO: ST FILE 

If we are, then we should be comfortable holding its shares through both good and bad times in the market.

There could be moments when the shares fall. They might even fall below the price that we bought them at. That doesn't mean we are wrong. Nor does it make it a bad investment.

The market at any point in time is made up of people who know what they are doing and those who don't. People who buy shares for non-value reasons will sell for non-value reasons.

So, to succeed in the market, we need to know what we are buying and why we are buying them. It is really that simple.

• The writer is the chief executive of The Motley Fool Singapore.

A version of this article appeared in the print edition of The Straits Times on October 09, 2017, with the headline 'Don't let fear rule how you invest'. Print Edition | Subscribe