Invest Now Or Wait For A Correction?

Someone politely confronted me the other day (that is…if a polite confrontation is ever possible) and asked what seemed like a very logical question.

The person wanted to know why anyone would want to buy shares now, if an imminent stock market correction was a distinct possibility. My confronter pointed out that we are always told to let a share price come to us rather than we try to frantically chase a rising market?

A well-trodden Benjamin Graham saying was even brought into the mix to reinforce the point. The natty quote being: “Choose stocks the way we choose groceries, not the way we would buy perfume”.

I couldn’t fault the logic. That is except for the part about an impending stock market correction being a clear-cut possibility.

If we knew that a stock market correction was a racing certainty, then some – if not most – of us would not be standing around idly. Instead we would be shorting the market to smithereens.

But the harsh reality is that we cannot know with any certainty that shares will fall. Or as John Maynard Keynes once noted: “Markets can remain irrational longer than you can remain solvent.”

Thing is, it is nigh on impossible to predict what shares might do in the short term. But we can work out for ourselves whether specific shares are cheap or expensive. That was the point behind Graham’s advice about buying groceries.

We, as investors, have a choice about what we buy and what we choose to leave alone. However, our selections have to be based on fundamentals. Buying on a whim is not really a strategy.

As Peter Lynch once said: “You have to know what you own and why you own it”. Simply saying that this baby is a cinch to go up doesn’t really count as being analysis.

There is something else to bear in mind too. Behind every stock is a company. And our job as investors is to find out what the company does.

Trouble is, some of us don’t spend nearly enough time scratching beneath the surface. Consequently, if we don’t do our research, the chances of succeeding from investing, as Peter Lynch pointed out, is “the same as playing poker without looking your cards”.

There is another thing to consider too.

Warren Buffett’s partner at Berkshire Hathaway, Charlie Munger, once noted that “If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

That is the key – holding good shares for the long term. And the “goodness” in this instance is companies that are able to deliver outstanding returns for shareholders over the long haul.

These tend to be companies that have a wide economic moat. In other words, they have a built-in, durable economic advantage. This makes it harder, if not impossible, for competitors to damage their bottom lines.

Do these companies exist in Singapore? Here are three quick clues.

If we had invested S$1,000 in Jardine Cycle & Carriage (SGX: C07) 20 years ago, our investment would be worth nearly S$8,000 today, provided we had continually reinvested our dividends.

If we had invested S$1,000 in Keppel Corporation (SGX: BN4) 20 years ago, our investment would be worth nearly S$10,000 today, provided we had continually reinvested our dividends.

And if we had invested S$1,000 in Boustead Singapore (SGX: F9D) 20 years ago, our investment would have grown to over S$14,000 today. That is – you guessed it – provided we reinvested our dividends.

So, do companies with built-in durable economic advantages exist in Singapore? I’ll let you answer that question yourself.

This article first appeared in a SIAS newsletter.

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