With all the talk about risk on and risk off, it is sometimes easy to lose sight of why we invest. Risk on, at the moment, is what happens when the market believes that the US Federal Reserve will continue to pump shedloads of money into global economies. With plenty of cheap-to-the-point-of-being-almost-free-money looking for a home, some of it could end up in the stock market, which would help to push stock prices higher. Risk off, on the other hand, is when the market thinks that the US Federal Reserve will start scaling back its money-printing activities. When they…
Risk on, at the moment, is what happens when the market believes that the US Federal Reserve will continue to pump shedloads of money into global economies. With plenty of cheap-to-the-point-of-being-almost-free-money looking for a home, some of it could end up in the stock market, which would help to push stock prices higher.
Risk off, on the other hand, is when the market thinks that the US Federal Reserve will start scaling back its money-printing activities. When they think that might be imminent, traders might pull money out of the market. Hence share prices could fall.
Over the last six years or so, the market has experienced moments when investors have felt that taking on risk has been warranted. It has also endured periods when investors think that assuming risk has not been justified at all. But in spite of the schizophrenia, global equities have almost doubled in value.
At the end of October this year, the total value of 58 major stock markets around the world reached $62.6 trillion. This was within touching distance of the all-time record of $62.8 trillion reached in October 2007. But back in 2009, after the financial meltdown, global equities slumped to just $29 trillion.
In Singapore, the Straits Times Index (SGX: ^STI) has doubled from a low of around 1,500 points in 2009 to around 3,200 points today. That more or less mirrors the gains made by many global markets.
But with stock markets almost returning to levels before the financial crisis, some investors who have been sitting on the sidelines are wondering if they might have missed the boat.
That is a perfectly normal question to ask.
However, we need to remember that every time we invest, we are buying a small stake in a business, which we believe could do well over the long term.
Consequently, using the overall market as a gauge could be about as pointless as putting plastic flowers in water. That is because we should be looking at individual companies and comparing their underlying value against their market value.
Charlie Munger once said: “It takes character to sit there with all that cash and do nothing. I didn’t get where I am by going after mediocre opportunities.”
Billionaire investor, Seth Klarman, said something similar. He said: “Rather than ratchet up risk, our approach has been to hold cash in the absence of opportunities.”
The key to investing is, therefore, to look for opportunities in the market regardless of what stock market indices might say.
Consider, for example, how Singapore blue chip shares have performed since the financial crisis of 2007. The benchmark index, the Straits Times Index, has rebounded by 100%. But the rising tide has not lifted all boats uniformly.
Companies such as Jardine Strategic Holdings (SGX: J37) and Sembcorp Marine (SGX: S51) have left the Straits Times Index standing. But some boats have been left behind. Notably, Singapore Airlines (SGX: C6L) has lagged the market’s rise by quite a wide margin.
But here’s the rub: A share that has risen significantly might still be cheap. And paradoxically, a share that has not risen at all might be expensive.
What matters is not the price of the share or how much it has risen but its intrinsic value. Or as Warren Buffett once said: “Price is what you pay. Value is what you get.”
So don’t be unduly concerned about missing the boat because you haven’t. Investing is about looking for mispriced shares in the market. And there will always be mispriced shares in the market.
So, just because one boat has set sail, it doesn’t mean that you have been left standing on the pier. You just need to be patient and wait for the next seaworthy vessel to arrive.
A version of this article first appeared in a SIAS newsletter.