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Where Next After Mid-Autumn Merriment

MoonCakesSeptember 19, 2013 will not only be remembered for being the day when moon cakes are consumed with relish but also the day that market traders relished Ben Bernanke’s unexpected announcement that he will not be dialling back his stimulus program.

The Federal Reserve chief wrong-footed just about everyone by announcing that the US central bank will continue with its monthly money-printing activities until the US economy improves further.

News that cheap money could be around for a little longer sent Japan’s Nikkei up 1.5%; Hong Kong’s Hang Seng jumped 1.6% and Singapore’s Straits Times Index (SGX: ^STI) climbed 1.7%.

Amongst the many blue chip gainers were Jardine Cycle & Carriage (SGX: C07), which soared 9% to S$39.30, while Jardine Strategic Holdings (SGX: J37) strengthened 6%. Meanwhile, CapitaMall Trust (SGX: C38U) hardened over 3%.

It seems that the investors have developed an appetite not only for moon cakes but for risk too.

But have you ever wondered how it is possible that a company, say, Jardine Cycle & Carriage can be worth S$12.8 billion one day and almost S$14 billion the next. What has changed that could account for over S$1 billion to be added to the market value of the business.

The thing to remember is that while the market value of the business has changed, the more important intrinsic or underlying value hasn’t altered at all.

That is perhaps the most important lesson from today’s Mid-Autumn merriment. From one day to another, the market values of quoted companies could vary as demand for shares rise and fall. However, the intrinsic value of the business has not.

Consequently, it is important for investors to appreciate the underlying values of the businesses they invest it. Buying shares below their intrinsic value is, perhaps, our best protection against loss.

Value investor Seth Klarmen once said: “Investing in bargain-priced securities provides a margin of safety – room for error, imprecision, bad luck, or the vicissitudes of the economy and stock market.

Sage words indeed to remember, especially at a time when the vagaries and vicissitudes of the economy can cause you to behave fearfully when the market is fearful when, in fact, you should be doing the exact opposite.

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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.