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Why You Should Really Hope For Falling Share Prices

I read with keen interest, a recent article written by my colleague David Kuo titled “How to Make Money From The World Cup. I’m a lover of the Beautiful Game and have been an ardent supporter of Netherlands since the days of Jaap Stam. They have not disappointed thus far, unlike the club I support, Manchester United.

In his thought-piece, David wrote that he wished for stocks to fall as a result of the month-long tournament. The rationale behind that is straightforward. He wrote, “I am a long-term buyer of stocks, which means that I want to continually add more shares to my portfolio. So I want to buy shares when they are attractively prices. I can’t do that if prices are always rising”.

I cannot agree more with him. As a long-term investor myself, I feel excited to see falling prices as that would mean that I can buy, at more attractive prices, shares of companies that I’ve always wanted to own. If you think I’m weird, then I’m certainly not alone in being weird. Billionaire investor Warren Buffett penned the following in his 1997 Berkshire Hathaway Annual Shareholder Letter:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves…

…But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

By purchasing shares of fundamentally strong companies on the cheap during a market crash (or perhaps during one-off events like the World Cup?), investors may sit on huge returns when the market recovers.

Take for example, the largest private medical outfit in SIngapore, Raffles Medical Group (SGX: R01). During the depths of the 2007-09 financial crisis, shares of the firm fell to a low of S$0.56, representing a price/earnings (PE) ratio of just 16. Today, it’s valued at a historical PE of 27 and has a price of S$4.01 (that’s a gain of 616% without accounting for any returns from dividends).

There are even more extreme examples of what it’s like to invest during a market crash. Sarine Technologies (SGX: U77), a designer and manufacturer of capital equipment for diamond manufacturers, provides one such instance. As measured from the start of 2007, shares of the company had fallen by close to 82% to a low of S$0.08 per share on February 2009. Investors who bought at that bottom would now be rewarded handsomely with Sarine Technologies’ shares rebounding by 3,113% to S$2.57.

Just like how you would pray for falling COE prices when you want to purchase a car in Singapore, falling stock prices should excite you instead of making you sick.

Foolish Bottomline

David is longing for Belgium to win the World Cup this year. His wish may just come true now that the country’s football team has edged into the quarter-finals of the tournament. But regardless of who wins the World Cup, you can make your own financial life one full of victories by capitalising on (to borrow a quote from David)“market lulls to make prudent additions to your portfolio.”

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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 doesn’t own shares in any companies mentioned.