A Fascinating Reason Why Investors Really Should Invest In Times of Panic

Editor’s note: This article has errant data in the table used in the article. Please read the edited version here. The Fool regrets the error. 

Born in 1840, Baron Rothschild grew up to become a prominent banker and British nobleman and politician. He’s often credited with the saying: “The time to buy is when there’s blood in the streets.”

Rothschild’s words make sense intuitively. After all, widespread panic can create widespread bargains. During the Great Financial Crisis of 2007-09, the Straits Times Index (SGX: ^STI) had fallen by almost two-thirds; it was at a peak of around 3,900 points in October 2007 before it fell to a low of around 1,500 in March 2009. Within a few days of the index’s bottom, as many as 191 shares in Singapore were found to be selling below their net current assets.

Those were shares in which investors could get a discount on a company’s current assets like cash, receivables, and inventories net of all its obligations. In other words, fixed assets like the company’s factories, machinery, and properties, were all thrown in for free. With less than 800 shares listed in Singapore currently, it’s easy to tell how cheap Singapore’s entire share market was back then.

To add more punch to the mix, even a bank like DBS Group Holdings (SGX: D05), which had remarkably robust earnings during the financial crisis even as Western banks were crumbling, was selling for only 0.6 times its book value at the Straits Times Index’s lowest point.

So yes – buying shares when there’s blood on the streets makes perfect sense from the standpoint of being able to pick up the biggest bargains. But, there’s another big reason why it makes almost perfect sense to invest during times of panic.

The following table shows the dates in which the Straits Times Index had logged its 10 best daily gains for the 21 year period stretching from 1 May 1992 to 18 December 2013:

Date Daily gain for Straits Times Index
19 January 1998 6.58%
17 June 1998 5.60%
6 January 1999 5.68%
11 February 1999 5.49%
19 September 2008 5.78%
13 October 2008 6.57%
9 December 2008 5.75%
13 March 2009 5.62%
2 April 2009 5.94%
4 May 2009 5.65%

Source: S&P Capital IQ

During that stretch in time, two of the most traumatic events to happen to Singapore’s share market had been the Asian Financial Crisis and the Great Financial Crisis. The former had started in July 1997 and it wasn’t until September 1998 when the Straits Times Index had recovered from its shellacking (the index had fallen by two thirds from January 1996 to September 1998). Look at the top four “best” days for the index and see if you can spot any similarities.

With the Great Financial Crisis of 2007-09, I already described how events unfolded for the Straits Times Index; from there, it’s easy to see how the other six “best” days had occurred during the crisis’ depths. In short – and although it might come as a surprise for some – the best days for Singapore’s share market had occurred during its darkest times.

But, what’s really interesting in here is this. Between 1 May 1992 and 18 December 2013, the Straits Times Index had delivered an annual compounded growth rate of 3.48%. If we took the index’s 10 best days away, it would see its annual growth rate plummet to just 0.12%. Putting things into perspective, there were more than 5,500 days of trading between 1 May 1992 and 19 December 2013. Yet, more than 95% of the index’s annualised returns had taken place in less than 0.2% of days.

Pulling everything together, I have two key takeaways.

Firstly, even if we put the issue of bargain hunting aside, it still makes absolute sense to buy when there’s widespread panic because the market generates its best returns during its darkest hours.

Secondly, it makes no sense to try and time the market if you’d want to stack the odds of success in your favour when it comes to investing; just missing a miniscule number of trading days carries the potential to absolutely decimate your investing returns.

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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.