The recent steep and unpredictable price movements of individual companies listed in the Philippine stock market has unnerved and discouraged a lot of Filipinos hoping to invest in stocks. This is a shame considering that, historically, stocks are one of the easiest and most profitable ways to grow your wealth over the long-term. To help ease your mind and hopefully put you on the path to financial freedom, we are giving you three ways to emotionally detach yourself from Philippine stock market volatility.
1. Think of stocks as units of business ownership.
Stocks are simply units of business ownership, nothing more, nothing less. When you buy shares of stock, what you are really doing is buying a piece of the underlying business, with the intention of sharing in its profits or capital gains. Think of yourself not as a speculator, but as a business partner. As long as the underlying business is sound (meaning the company is making a profit and will, for the foreseeable future, continue to make a profit), the fact that the stock prices are falling should not concern you.
2. Think of the market as a bi-polar, emotionally volatile business partner.
There’s a popular character introduced by legendary investor Benjamin Graham to help investors deal with stock market volatility: Mr. Market.
Imagine that you have a business partner named Mr. Market, who obligingly turns up everyday at your door to sell his ownership share or buy your ownership share in the business you both own. You know that he is emotionally volatile, and experiences moments of extreme happiness, extreme sadness and everything in between. The buy-sell price quoted by Mr. Market is usually connected with whatever he is feeling at that particular day (if he’s happy, he quotes ridiculously high amounts, but when sad, quotes bargain-bottom prices). You are free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn’t mind this, and will be back the following day to quote another price.
The Philippine stock market is Mr. Market. Think of the prices quoted at the exchange as the ramblings of a bi-polar, emotionally volatile business partner. That way, assuming that the underlying business is sound, you can sell your ownership share when Mr. Market is happy (and quotes ridiculously high prices) or buy Mr. Market’s ownership share when he is sad (and quotes ridiculously low prices). Mr. Market doesn’t mind if you take advantage of him.
3. Focus on the fundamentals, not current stock price.
Imagine that you’re in the market for real property. You have a small family, and you want to rent out whatever property you buy so that you have a bit of extra money you can stash away for your family’s future. You hire the services of a broker, and you tell him that you have a budget of a million pesos.
In a few days, your real estate broker comes back and gives you two options: a run-down, old bungalow in a bad part of town which appears to be on its last legs, or a pristine, two-story townhouse near a mall and a good school. The first house used to be sold at half a million pesos but is currently being sold at a million pesos. The second house used to be sold at a million pesos but is currently being sold at half a million pesos. In this scenario, which house would you choose?
For most people, this is a no-brainer. That’s because they will instinctively look at the fundamental physical aspects of the house (its location, age, size, floor plan, amenities, durability, etc.) to get an estimate of the house’s actual value. They will not base their purchasing decision on the price offered by the broker. They would especially not buy a house based merely on the fact that it is now more expensive than it used to be!
It’s the same way with the Philippine stock market. Think of stocks not as tradable pieces of paper but as units of business ownership. Except in this case, instead of a house you can rent out, the business can be anything (banks, retailers, holding companies, property developers, etc.). This way, you can focus on the fundamentals of the business (Does it make money? Are its growth prospects good?) and not merely on the stock price. In the same way that you can make a bargain buying the pristine house in the good part of town at half its previous value, you can also find a lot of undervalued stocks in the stock market.