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Why Are Singapore Shares Cheap?

The Motley FoolA quick trawl of global stock markets reveals something quite unexpected – Singapore shares do not look expensive.

Compared to, say, stock markets in the US, the UK, Japan, Australia and Germany, our Singapore shares might even be said to be ostensibly cheap.

The question, though, is why.

Currently, US investors are paying around $19 for every dollar of profit that American companies make. Meanwhile, UK and Japanese shares are valued at 15 and 17 times earnings, respectively. Elsewhere, Australian shares are priced at 19 times earnings, while German shares are valued at 14 times profits.

Over-the-top

So why, then, are Singapore shares, as represented by the 30 companies that make up the Straits Times Index (SGX: ^STI), valued at a modest 12 times earnings?

The obvious, though perhaps unhelpful, answer is that there are more sellers than buyers of Singapore equities.

The stock market is essentially no different to any other market. At any point in time, there will be people who will want to buy shares and those who will want to sell them. If there are more buyers than sellers, then demand for equities is likely to push up prices. Conversely, if there are more sellers than buyers, then prices could fall.

However, the point is this: If you are a true investor, it doesn’t matter a jot what other people do or don’t do.

When we buy shares, we are looking to buy stakes in businesses that we believe will reward us over the long term. The fact that other investors are not buying is, to put it bluntly, irrelevant to our investing decision.

In fact, it could benefit us more if no one else is interested because it means that we are less likely to pay over-the-top for the shares we want to buy.

Instant gratification

Another point worth noting is that there are two separate ways we can benefit from investing in shares. The first is through capital growth, which is when the shares we own rise in value. That part of investing usually gets people very excited because it provides instant gratification, and who doesn’t like to be gratified instantly.

The second way we can benefit from investing is through dividends. The income component from owning shares is often overlooked as being the ugly cousin of stock market investing – the one that nobody likes to talk about. But nothing could be further from the truth. It is, for me, the more beautiful part of the total returns we reap when we buy shares.

If you haven’t already noticed, total returns, for a variety of reasons, are not widely reported. We rarely hear it mentioned in the media. So, I was once tasked by the BBC to explain the concept of total returns in a consumer-friendly way. Here’s what I came up with.

My lovely kumquat

Let’s say I go out one day and buy a kumquat plant. As it turns out, the plant is a good one – it produces an abundance of orange, bell-shaped fruit. Now, if I had paid $30 for the kumquat plant and later sold it to my envious neighbour for $30, then theoretically I haven’t made any money.

But during the time that I owned the kumquat plant, I have had the benefits of the fruits. I could have converted the kumquats into jam and jellies or just simply eaten them, if I wanted.

In other words, I have enjoyed tangible benefits from owing the kumquat plant. But if I had allowed the fruits to wither, then I would have wasted the obvious advantages from keeping the plant.

The same goes for investing in shares. If we own dividend-paying shares but allow the dividends to be wasted (or worst still, allow others to take what is rightfully ours) then we are missing out on a vital part of our total returns.

Oil tycoon and America’s first billionaire, John D Rockefeller, once said that the only thing that gave him pleasure in life was to watch his dividends roll in.

He is right. But perhaps the second greatest pleasure in life is to reinvest those dividends to generate even more dividends and more pleasure for the future. Some people call it compounding. I just call it common-sense investing.

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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.