How To Make Money In This Market

The Motley FoolOne of the most common question I am asked about the market at the moment is why are shares rising. My answer, which always sounds hollow, is because there are simply more people wanting to buy shares than there those who want to sell.

That’s the truth – even if it does sound a little flippant.

Thing is we like to think of the stock market as some kind of sophisticated trading arena with flashing ticker boards where traders wearing coloured jackets congregate to make money. We, perhaps, forget that the stock market is merely an auction house. It is where people vie against each other to see who can offer the most attractive prices to buy and sell shares.

What a few trillion dollars can do?

These days much of the bidding is done at our desks in front of our computer screens where we submit orders to either acquire shares or dispose of the ones that we already own. The more we want to own a share, the higher the price we are prepared to bid for the asset.

So the question we should be asking isn’t why shares are rising but rather why are more people interested in buying shares now.

What has changed over the last few years that have enticed more people to part with their cash to buy an asset that they once deemed to be too risky?

What’s changed is that Federal Reserve chief, Ben Bernanke has printed and pumped billions upon billions of dollars into the US economy. His intention for doing so was clear from the outset – to drive down interest rates and lift asset prices.

Bernanke wanted to boost house prices by making home loans more affordable. He also wanted to lift the share market by making the alternative – bonds – desperately unattractive. It took a little while for his scheme to take root but it’s amazing what you can do with a few trillion dollars at your disposal.

A rising tide lifts all boats

Once professional investors started to push the stock market higher, it was only a question of time before private investors followed suite and gradually move their money out of savings accounts into shares too. The upshot for us in Singapore is that the Straits Times Index is today some 130% higher compared to its nadir of 1,493 points on 12 March 2009.

It is sometimes said that a rising tide lifts all boats and that is precisely what has happened to Singapore shares. The rising tide of money has lifted every constituent of the benchmark index – 14% in the case of Singapore Airlines and as much as 400% in the case of Jardine Cycle & Carriage in four years.

The flaw of averages   

Interestingly, the Singapore market is still only valued at 14 times earnings despite the surge in share prices. In other words investors are paying on average $14 for every $1 of profit that Singapore companies make collectively.

By comparison, Singapore deposit accounts are only paying an interest rate of 0.25%. In other words you would need to put $400 into a savings account for one year to achieve the same return of $1 from shares.

Of course averages can be very deceptive as the man with his feet in the oven and his head in the fridge might say – on average I actually feel quite comfortable. The market average may be 14 times earnings but some shares are valued much higher while others are valued considerably lower.

Consequently, it important to select carefully the shares we wish to buy. We should not be overly concerned that many markets are at an all-time high. However, we do need to be more discerning about the companies we invest in. We need to scrutinise our watch-list of shares even harder and understand the intrinsic value of the businesses we are interested in.

The key to successful investing is patience. It can be very tempting, especially in a secular bull market, to buy something (or indeed anything) simply because it is going up in price. But that is generally how short-term delight also, generally, ends in long-term misery.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.