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The One Bubble Chart You Must See

One

For investors who are following Singapore’s stock market, October this year was a particularly eventful month as it saw the spectacular collapse of three shares: Blumont Group (SGX: A33), Asiasons Capital (SGX: 5ET), and LionGold Corp (SGX: A78).

All three shares lost more than 90% of their market value in a span of three trading days from 4 Oct to 8 Oct.

Prior to their collapse, the trio had actually seen some rather spectacular run ups in their prices, leading to frothy valuations. In such cases, it’s hard not to label them a bubble.

My colleague Stanley Lim had recently shared some of the key characteristics of market bubbles that were derived from the theories of Hungarian-American billionaire investor/speculator George Soros.

It’s a useful framework for investors to think about bubbles, but I thought I’ll complement it with real numbers from real companies to help others gain a better perspective of a bubble in action.

Here’s what I mean, using Blumont’s share price and book value changes from three years ago as an example:

Blumont Group Bubble Chart

Source: S&P Capital IQ

Looking at the chart above, Blumont’s book value (assets that accrue to shareholders after deducting all liabilities owed by the company) had increased by around 100% since 17 Dec 2010.

But, crucially, in its explosive run-up prior to its collapse, Blumont’s share price had jumped by close to 12,000%. In the process, its share price likely lost any connection to the real economic value of its business, of which book value is a good proxy. That’s what I mean by a ‘bubble’.

It’s important to note here that huge share prices do not automatically mean that a bubble has formed. Price gains can be warranted if proxies for a company’s true economic value – such as earnings, cash flows, and book value – increase in tandem.

For instance, marine engineering outfit SembCorp Marine (SGX: S51) has increased in price by 524% since 17 Dec 2003. But its book value has managed to post a 163% gain in the same time. There is a difference between the growth rates in the two figures, but there’s nothing too disconcerting.

SembCorp Marine Chart

Source: S&P Capital IQ

At the end of the day, investors have to realise that over time, a company’s share price would eventually reflect its true economic value (also known as intrinsic value). The problem though, is that share prices can – and did, as in Blumont’s case – diverge wildly from a company’s fundamentals over shorter spans of time.

As such, it sometimes pays to overlay a company’s share price changes with changes in its fundamentals to put things into perspective.

Foolish Bottom Line

Benjamin Graham, an intellectual giant in the field of investing, wrote more than six decades in his book The Intelligent Investor that “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Those words still ring as true as ever today.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.