How To Cope With Market Madness

The global economy is gradually returning to normality after half a decade of abnormal stimulus from the US. But the market is finding it hard to adjust to the new normal.

During the last four years or so, many of us who had the courage to invest at the bottom of the market will have made some significant gains. Since, 10 March 2009, the Straits Times Index (SGX: ^STI) has more than doubled from a low of 1,456 points to 3,106 points today.

Some of us are probably also feeling quite pleased with ourselves as a result, and so we should. After all we didn’t sit on our hands contemplating the end of capitalism, which some ill-informed commentators were suggesting.

The question, though, is where do we go from here?

Thanks to Ben Bernanke and the US Federal Reserve, billions of dollars have been pumped into the US economy. Some of that money, intentionally or otherwise, spilled over into our markets. That rising tide of money lifted all boats. So, many shares, whether deserving or not, were lifted by the swathe of money hitting our markets.

But now, The World Bank has warned that global economic growth is likely to be lower than expected. It reckons the world economy might only expand 2.2% this year compared to its earlier estimate of 2.4%, as America ponders the right time to dial back its money-printing activities.

There are a couple of takeaways from the World Bank’s economic forecast.

Firstly, it is only a forecast, which we should take with a large pinch of salt. After all, if the number crunchers at the World Bank were really that good, then they wouldn’t need to revise their forecasts at all. But they have. That’s the first takeaway.

The second, which for me is probably the more important, is that we have been spoilt by the diet of cheap US dollars. The impact of which should not be underestimated.

The flood of money has lifted every constituent of the Singapore benchmark index: Jardine Cycle & Carriage (SGX: C07) is up a whopping 386%; Genting Singapore (SGX: G13) has put on 232%. Even Singapore Airlines (SGX: C6L) is 4% higher.

Thing is, picking stock market winners was easier than shooting fish in a barrel. But as we enter the new normal, finding shares that are likely to reward us is unlikely to be as easy.

So, the question is this: are you completely comfortable with the shares that you have bought for your portfolio? Are you confident that your thesis for purchasing the shares will continue to hold as we enter the new normal?

If your answer to both question is no, then perhaps you should re-visit the reasons why you bought the shares in the first place. But if your answer is yes, then it might be a good time to take advantage of the weakness in the market to buy more of what you like at a cheaper price. That is what separates the skilful investor from the lucky investor – buying under-valued shares in times of market madness to hold for the long term.

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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.