How To Shift Focus from Fear in This Market

In a lot of groups on social media discussing the stock market, there’s a lot of fear these days. One person was asking, when does the downward spiral in the stock market stop? He was clearly frustrated and likely due to having a portfolio in red. The comments were generally mean and many people were mocking him. I felt bad for the guy – it’s not a fun situation to be in.  There's really no need for being mean or laughing at others these days. Let's help each other out instead and that's what I will do with this article. 

In the post from the fearful guy a lot of people shared their take on when the market would rebound. But the fact is that no one has a crystal ball that can predict when this market will end. There are hundreds of thousands of experts out there – if not millions – that are predicting when this will end and the only thing we can be certain of is that with so many opinions, one of them will be right in their prediction. Someone will be right about their prognosis - hundred thousand wont.

So how do we stay focused and not let ourselves succumb to feelings of fear. The answer is shifting your focus away from the macro economy and from macro trends. Instead, you want to focus on finding one quality company. Focus on one company that’s listed on the stock exchange and find as much information about that business as you can. 

There’s so much macro information out there in the world right now. It’s overwhelming and if you focus on all the stocks in the stock market – even bundled stocks like ETFs (exchange traded funds) - it can quickly be to much for the brain to handle. It’s a lot to cope with. When zooming in on one business you’re free of listening to everything and can listen to news about this business and only this business. Go hunting for one awesome company - a super healthy business.

Here is a list of things you can check to ensure that it’s a great and healthy business:

• The company has no long-term debt – or if they do, they can pay it off within 3 years from the earnings.
• The company has a profit every year for at least 10 years. We’re not looking for companies that are coming out with a loss (you can search for this data on Google – there are many websites that will show you the profit (or loss) over 10 years).
• Once you’ve checked for these two factors you can look at how much money the company spends. Because like in personal finance you want to make sure that the management doesn’t spend more than they earn. For that you can calculate what’s called a “current ratio” – this will show you if the company is short of cash. The way to calculate it is easy. Simply divide current assets with current liabilities. You find these numbers in the company’s annual report or on ex. Yahoo Finance. Warren Buffett (who is the most successful investor on Forbes Billionaire list) likes a current ratio above 1.5. 

• If the company has no debt, you can check the ROE – Return on Invested Capital. Make sure it’s above 10%. You can read more about ROE and what you need to check for if the company has debt in this article: How Can You Tell if a Company is Well Managed?
  
  
• make sure the company is easy to understand. A production company producing chewing gum needs to sell more than the gum costs to produce. That's pretty easy to understand. Other businesses are much more complicated (for most people) like biotech, fintech, banks and insurance companies.

If you want a list with even more facts, download my checklist. It’s free and it will help you determine if a company is a quality business.

Finally: when you’ve found a healthy quality business, you must ensure that you’re not overpaying. Because even though the market is down and people are shocked about how much money they’ve lost, there are still a lot of businesses out there that are way too expensive compared to what it’s really worth (the buildings, machines, inventory, cash etc. – all that give you an indication of what the company is worth). You will likely lose money if you buy a company that’s overpriced in the stock market. I’ve written an article about how you can calculate the worth of a business – how you can find out what stock price you should pay for a company to not overpay. Read the article: How To Find a Stock Price?