Handling Mr. Market’s Mood Swings

With the recent volatility experienced by Mr. Market’s violent mood swings, investors may have been left in shell-shocked mode. These violent episodic mood swings can be likened to what occurred last October 2008 with the collapse of Lehman Brothers, and as the market digested the possibility of the collapse of the global financial system. Back then, the market had begun a nightmarish tailspin into the depths of depression, and valuations had hit a nadir (at least, for some of the companies I was eyeing back then). So there is some truth to the adage that investing is best when pessimism is at its peak, as it creates situations whereby superb and advantageous valuations arise on well-run, fundamentally-sound companies !

During such times, it is important to have a sound investment philosophy and criteria with which to rely on in order to make investment decisions. It used to be the case that a few years ago, before my value investing days, I was still stumbling around in the dark trying to ascertain if I should trade, contra or invest ! I had no guidance and was not aware of what was going on out there, and that is a very dangerous situation indeed. Of course, I lost some money along the way and made the classic mistakes which most “newbies” make, which I have detailed down under my “Investment Mistakes” category. Fortunately, I did not have to try out and get burnt by warrants and shorting for me to realize that those were extremely risky speculative activities which could have landed me in hot soup ! So it actually pays to learn from others’ mistakes instead of making your own.

With the proper framework and mindset, one can then go about searching for good and sound companies which are trading below their intrinsic value. It is the investor who welcomes bear markets and Mr. Market’s volatility as a way to scoop up shares cheaply and at attractive valuations. When one perceives the ownership of shares as being part-ownership of a company, his perspective will change and he will welcome lower prices and pessimism as a way to collect more shares cheaply. I did not realize this until I read up on books which described value investing and in making Mr. Market my servant, not my master. By accepting quotes from him only when they are attractive, you are taking advantage of his pocketbook and are free from his mental influences.

Though people speak of bear markets fearfully and shun low share prices, it is the wise and astute investor who can separate the wheat from the chaff and go after the fundamentally sound companies which have been beaten down along with the rest of the rubbish. A good and easy way to invest would be to select strong blue chips such as banks, telcos (SingTel) and renowned property companies (e.g. Capitaland, CDL) during such troubled times, as they will be the first to bounce back in terms of earnings due to their sturdy Balance Sheets.

Ultimately, as investors, we have to maintain mental discipline in the face of what is sometimes described as a mentally taxing environment. Since money plays such a significant role in our lives and livelihood, the thought of losing money can affect one emotionally and leave one scarred. The stock market is a place where emotions are running high all the time, and it is up to the intelligent investor to remain calm, patient, rational and objective in searching for gems to purchase. This is my advice to aspiring investors; and also one which I have to constantly remind myself of. After all, being a human being myself, I cannot avoid the feelings of greed and fear. It is the control of these emotions which will eventually allow one to derive a decent long-term return from the Stock Market which exceeds inflation.

Note: Many of my companies’ financial results will be released starting from May 14, 2009 (Swiber), so I will spend time digesting the information before reviewing and analyzing in a separate post. China Fishery should report on May 15, while Boustead and Tat Hong are reporting on May 28 and Pacific Andes on May 29.