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How to Invest at a Market High?

Yesterday, the Straits Times Index (SGX: ^STI) closed at 3,300 points. The last time the index closed at that level was almost exactly a year ago on 31 May 2013 when it ended at 3,311 points.

After that, the index started a gradual decline of close to 10% and bottomed out around 2,950 points in February this year. With the index back to where it was 12 months ago, should investors be worried?

Here are some helpful pointers on what to do when the market seems to be at a ‘high’.

1. Focus on the market’s value

Would you believe me if I said the Straits Times Index would be very expensive at 1,000 while being very cheap at 5,000? Well, I would – if the index was valued at say, 30 times earnings at 1,000 points but only 10 times earnings at 5,000.

Thing is, what really matters isn’t the absolute level of the index. It’s the price level of the index, relative to the underlying profit of its constituents. The table below gives you an idea of what I’m talking about, using the S&P500’s (a broad stock market index in the USA) data:

Sep 2000

Today

% Change

S&P 500 points level

1,507

1,920

27%

S&P 500 trailing PE ratio*

31

20

-35%

*Trailing PE ratio uses normalised earnings as denominator

Source: S&P Capital IQ

Even though the S&P500 is some 27% higher today as compared to where it was in September 2000, it’s actually quite a fair bit cheaper now.

What about the Straits Times Index? Using the SPDR Straits Times Index ETF’s (SGX: ES3) data as a close-proxy for the actual fundamentals of the Straits Times Index, the index is seen to be selling for around 14 times its trailing earnings. At its current level, the index is actually selling at a slight discount to its long-term average Price-Earnings (PE) ratio of 16.6. Such information can then be used to determine if there actually is any value to be found in the market.

All told, don’t focus on just the price level of the market. Look beyond that and think about the underlying fundamentals of the index’s constituents for an indication of how high or low the market truly is.

2. Look for individual bargains

As cheap or as expensive as the Straits Times Index may be at any given moment, there can be huge disconnects between the valuations of individual shares and the market index.

On one hand, a large conglomerate like Keppel Corporation (SGX: BN4), with its market capitalisation of S$19.5 billion, is only valued at 11 times trailing earnings. That’s almost 20% cheaper than the Straits Times Index itself.

On the other hand, you can have a much smaller share like Yoma Strategic Holdings (SGX: Z59) – the company’s market capitalisation is only S$937 million – carrying a trailing PE ratio of 57. That valuation is four times higher than the index’s.

With examples like that, the bottom-line is this: Don’t let the market’s movement deter you from trying to sieve out individual bargains.

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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.