What Shares Should You Invest In at a Market High?

Last week was an eventful one for the US share market as the Dow Jones Industrial Average finally surpassed its previous all-time high of 14,198 set in October 2007. Back home, the Straits Times Index (SGX: ^STI) is still 18% lower than its record of 3876 in October 2007 but it is no slouch either – the STI has surged by 24% since the start of 2012.

The share markets have seemingly climbed a wall of worry to post great gains amid concerns about Europe’s sovereign-debt problems, China’s possible hard landing, and the on-going sequestration drama in the USA.

Should investors be worried and what should their next move be? Here are some helpful tips on what to do during a market high:

Focus on market value

There is often a big hoo-ha made by the financial media over share market highs and lows, and they often place arbitrary goal posts for share market indices based on the index level. Thing is, they are missing the bigger picture – what matters is the underlying profit of the companies that comprise these market indices. The STI is not expensive at 3800 if an investor is paying 10 times for its components’ underlying profit. Similarly, the STI will be expensive even at 2000 if an investor’s paying 40, 50 or even 60 times the earnings of the 30 companies in the index.

Famed value-investor and the world’s fourth richest man, Warren Buffett, gave a speech in 1999 on the idea of ‘value’ in the overall share market. Buffett’s take in 1999, before the crash of infamous dot-com bubble, was that the share market was wildly overpriced as investors were paying almost $30 for each dollar of profit. The growth in overall corporate profit simply could not keep pace with what investors were paying for. It was not an attempt to time the market by Buffett, but an attempt to discern value in the market.

Closer to home, we too, can focus on value rather than price by looking at the underlying earnings of the companies making up the STI. As the STI continues its inevitable roller-coaster ride (as the share market will always do), we must not forget that its constituents are still chugging along and making profits. According to Bloomberg, the current Price-Earnings (PE) multiple of the STI is 11.1 and we can compare that with the index’s historical Price-Earnings multiple of 15.2 to judge the presence or absence of ‘value’ in the overall share market.

Look for bargains all the time

As important as it is to look at overall market valuation, here at the Motley Fool Singapore, we find it far more interesting and profitable to hunt for opportunities to invest in individual companies. Investors like Buffett have managed to outperform both bull and bear markets by looking for bargains all the time. Buffett managed to grow Berkshire Hathaway’s  book value by a cumulative 470% in the 1982-1987 US bull market compared to the S&P 500 Index’s 260% return. In the 1973-1977 US bear market, Berkshire’s book value increased by a total of 280% even as the S&P 500 dropped by a total of 1.5%.

Similarly, there are still opportunities to invest in blue-chips with a PE multiple that is lower than the market’s. South-East Asia’s largest bank, DBS Group Holdings (SGX: D05) and energy and marine engineering firm Keppel Corporation (SGX: BN4) are trading at PEs of 9.9 and 9.5 respectively at the close of 08 March 2013.

For investors who are rummaging the bargain bin in the income-department, they might find companies like property investor Second Chance (SGX: 528) and infrastructure-engineering firm Boustead Singapore Limited (SGX: F9D). The former has a dividend yield of 6.8% while the latter’s yield is at 3.7% (at 08 March 2013’s share price) and both are higher than the STI’s 2.5%.

The bottom line is this: Don’t let the market’s movement deter you from trying to sieve out bargains.

The Foolish Bottom Line

Regardless of what happens in the share market, Buffett’s admonishment for all investors to “purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now” will always ring true.

Investing in the share market is a marathon measured over years and decades and it is a long-term approach to investing in profitable and growing companies that will ultimately deliver lasting profits for investors. Because of that, there is no other way to achieve investing success besides staying true to the mantra SGX:BN– Keep Calm, and Carry On. If you would like to keep up to date with what’s happening in today’s markets and GROW your wealth in the years ahead, click here now  for your FREE subscription to Take Stock Singapore. Take Stock Singapore, written by David Kuo, is The Motley Fool’s free investing newsletter.

The Motley Fool’s purpose is to help the world invest, better. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing owns shares in Berkshire Hathaway.