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Investing In An Unwilling Bull Market

The Motley FoolGosh! What a rollercoaster ride it has been for investors in the last month or so. Just when the Straits Times Index (SGX: ^STI) was within touching distance of 3,500 points, Singapore’s benchmark index turned turtle and started heading lower.

Truth is, the bull market that started back in 2009 is probably one of the weirdest rising markets I have seen. Since March 2009, the Straits Times Index has more than doubled from a low of 1,456 points to almost 3,300 points today.

Strange But True

But here’s the thing – the rise has been achieved against a backdrop of, what I consider to be, less-than-favourable economic news.

Generally, we tend to find that positive economic news helps to drive stock markets higher. That’s because when times are good, companies tend to make more profits. Conversely, negative news about the economy tends to send stock markets lower. That’s because companies might find it harder to make higher profits when times are tough.

But not this time around

What we find this time is that positive news about the economy can send share prices lower, while any negative news seems to send the market into raptures of delight. And we can thank Ben Bernanke, the Federal Reserve chief, for the bizarre performance of share prices in this unwilling bull market.

Thing is Ben Bernanke pledged three years ago to safeguard a US recovery, come what may. That promise resulted in the US central bank pumping billions into the American economy – $85 billion every month to be precise.

Thankfully, for him as well as for us, there are signs that monetary easing is working. American property prices are starting to rise, US unemployment is gradually heading lower and American consumers are starting to feel more confident.

Those indicators should be seen as positives for the stock market around the world. After all, higher US property prices could mean that American homeowners should start to feel wealthier. Meanwhile, more American people in work coupled with higher consumer confidence should mean more shoppers heading onto US Main Streets to whip out their wallets and cheque books to spend money.

On Your Bike

But here’s the rub. It also means that the US central bank may not need to pump as much money into the economy and that is what is spooking the market.

On a CNBC programme a couple of weeks ago, I compared Ben Bernanke’s monetary easing to parents who teach their children to ride a bicycle for the first time with the help of stabilisers.

The stabilisers help to keep the bicycle upright. But at some point, the stabilisers will need to come off. The parent knows that. The child knows that too. But it is nevertheless a scary experience for both the parent and the child when the time arrives to remove the stabilisers.

Ben Bernanke faces a similar dilemma. He will need to decide the right time to remove the economic stabilisers that would not jeopardise all the hard work that has gone into helping the US economy recover.

But if we think about it logically, the time when the Federal Reserve starts to taper monetary easing should be seen a time for celebration and not a time for despondency. That’s because the US has finally learnt how to ride a bicycle without falling off.

Where Next For Shares

Interestingly from an investor’s perspective, the rise in shares over the last four years has mainly been driven by income-producing, high-yielding, blue-chip shares, as investors look for lower-risk alternatives to traditional savings accounts.

Normally though, these types of shares tend to fair less well than cyclical shares in a bull market. But not in this bull market.

For me, this suggests that the stock market may still have some way to go as the next leg of the bull market may be driven by cyclical shares. These are companies that tend to fair well when economies start to grow.

But whether you are an income investor, a value investor or a growth investor, the key to successful investing is to continually look for undervalued shares that will improve your wealth over time.

So go back and look again at those shares that you wanted to buy but never did.

Warren Buffett once said: “You don’t drive a truck that weighs 9,900 pounds across a bridge that says ‘Limit 10,000 pounds’ because you can’t be that sure. If you see something like that, go a little further down the road and find one that says, ‘Limit 20,000 pounds.’ That’s the one you drive across.

Remember, a market sell-off can be a great opportunity to buy the shares you always wanted to own but couldn’t because they were too expensive. So now that they are cheaper, you should be able to drive across that ‘investing bridge’ with a greater margin of safety.

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.