How to stay sane while others are losing their minds

If there is one lesson we can all take home from the recent Covid 19 virus outbreak, it is this - people around us can behave extremely irrationally and panic even though the news may not be that serious.

Unfortunately, that happens in the stock market as well.

The virus outbreak started in late 2019 and has morphed into a monster of a problem, with more than 1,700 dead and nearly 70,000 infected, mostly in China.

While the numbers are indeed alarming, we have to remember that China itself is the epicentre of the plague.

Even though other countries such as Singapore and Hong Kong have been affected, the problem isn't half as bad as what the media makes it out to be.

PANIC ON THE STREETS

With the recent upgrade to Dorscon Orange in Singapore, due to the heightened threat of community spread, some people have taken to panic buying of essentials such as canned food and toilet rolls.

NTUC Fairprice has even had to impose restrictions in order to ensure its shelves are well-stocked.

Over at Hong Kong, an armed gang resorted to stealing hundreds of toilet rolls as the city reels from panic buying.

We may look at such examples and laugh to ourselves at this apparent foolishness.

But make no mistake, this kind of behaviour occurs fairly often when it comes to the stock market. So, how should investors stay sane while others may appear to be losing their senses?

MASTER YOUR EMOTIONS

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The first rule to remember is that emotions can run high when bad news occurs.

In the case of Covid 19, the news of border restrictions, air travel curbs and quarantine procedures led to investors selling down the stocks of related industries such as tourism, transportation and hospitality.

This knee-jerk reaction is caused by the uncertainty around the Covid 19 outbreak.

For investors, it's important to remain rational even if others around us are panicking.

Your interests are better served by calmly assessing the situation. Emotions can cause you to do exactly the wrong thing like selling at a beaten-down stock price.

By thinking through the issues rationally, we can then begin to formulate a strategy on what we should do and how we should react to the situation, in order to avoid taking action that may fill us with regret in the future.

FOCUS ON THE LONG-TERM

Another tip to remain calm is to focus on the long-term prospects of any investment we make, rather than be overly fixated on the short-term.

Yes, bad things do happen now and then, and these may impact the companies we invest in. However, as long as the long-term thesis remains intact, we should look past the short-term problem in favour of long-term trends.

A virus outbreak, while bad, is usually temporary in nature as governments and institutions devote their best resources to containing and fighting the disease.

So, while the hit to earnings and operations may indeed be severe, investors need to remember that these effects will generally not last beyond a few quarters.

And a few quarters are, in the grand scheme of things, merely a blip in the lifetime of the long-term investor.

GET SMART: GREAT COMPANIES CAN OVERCOME ADVERSITY

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Every company will face difficulties and challenges along the way. But the great companies will find a way to come out stronger in the other end.

History is replete with many examples of companies that went through crises but managed to weather them. This is due to both their strong business model and a stellar management team.

So, if you are confident that you have invested in a sturdy company with robust fundamentals, then you need not fear economic turbulence or events such as a virus outbreak.

Companies with strong processes, a clean balance sheet and a track record of free cash flow generation should be able to stand their ground while other competitors fall like dominoes around them.

That is the benefit of investing in fundamentally-strong companies that can offer a peaceful night's sleep.

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This article was first published in The Smart Investor.