The Best Time to Sell During a Market Crash is…

Back in 2009, the Straits Times Index (SGX: ^STI) hit a low of 1,457 points in March. That was a whooping plunge of some 62% from its peak of 3,805 points seen in October 2007. Given the magnitude of the decline, it’s not hard to imagine how many investors would have clamoured for the exit. However, is that the wisest thing to do?

Let’s turn to Sir John Templeton, whose Templeton Growth Fund had posted a 13.8% annualised average return from 1954 to 2004, for some answers. He has said that if there are good reasons to hold on to a share before a crash, there should be even better ones to stay invested after the crash. In other words, we should not sell during a market crash but rather, hold on to the share if its business fundamentals are still intact and if it is undervalued. In fact, if the price is low relative to its intrinsic value, we should even buy more; market crashes are a great opportunity to purchase great businesses on the cheap.

Warren Buffett once famously quipped that we should be greedy when others are fearful and be fearful when others are greedy; a crisis is the best time to get greedy. During the 2008-09 Great Financial Crisis, companies such as Raffles Medical Group (SGX: R01) and Vicom (SGX: V01) were beaten down to extremely low Price/Earnings (PE) ratios of around 7 and 9 respectively.

Logic had flown out of the window then as investors failed to realise that despite the vagaries of the economy, people would still have to visit a doctor if they are unwell or send their cars for inspections according to a legally-mandated schedule (Raffles Medical’s in the business of providing healthcare services while Vicom runs vehicle inspection centres among other inspection and testing services). Five years on, and we have Raffles Medical up more than 300% with a PE of around 22 while Vicom’s some 280% higher with a PE of 18. If you had bought both shares before the crash, it would have made perfect sense to buy more both during and after the crash, instead of abandoning ship. Both companies were even paying healthy dividends to boot during the throes of the crisis.

One of Warren Buffett’s long-time and largest holdings, Coca-Cola (NYSE:KO), has been a feature of his portfolio since 1988. During the 26 years in which Buffett has held on to shares of the U.S.-based fizzy drinks maker, both the American and global economy had seen many crashes. On average, a full market cycle (from peak to trough to peak) happens once every five years. Since 1988, an average of five crashes would have occurred. But, Buffett held on to those shares and has even bought more at times. Today, the company is worth many times Buffett’s initial investment.

It’s always good to go back to the quotes of investing legends like Sir John Templeton and Warren Buffett to help keep us “sane” during a market crash. If there are good reasons to hold on to a stock prior to a crash, there should be even better ones after the crash and we certainly must be greedy enough to buy more during such episodes. Therefore, to complete the title of the story, the best time to sell during a market crash is… almost never.

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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 contributor Sudhan P owns shares in Vicom.