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Buying Stocks In A Perfect Storm

A perfect storm is brewing in global markets.

China is slowing. The Eurozone is facing one of its sternest tests with the threat of a Greek exit. And plunging oil prices is creating the greatest uncertainty for global markets since, well, the last time we had the greatest uncertainty for global markets.

Investors are beside themselves with worry.

Will China try to save its blushes by pumping more cash into its unbalanced economy? Will European bureaucrats try to save face by throwing an olive branch to the people of Greece? And will embattled oil producers try to save money by moth-balling their unprofitable wells?

In times such as these, it is easy to lose sight of the long term and, instead, focus on the here and now.

But the only thing that we should concern ourselves with is valuation. That speaks volumes.

Currently, the Singapore market is valued at 13 times earnings. Put another way, we are paying S$13 for every dollar of profit that Singapore companies collectively make.

If every Singapore company were to pay out all their profits as dividends, that would equate to a theoretical dividend yield of around 7%. By comparison, a safe investment such as a 10-year Singapore bond is yielding 2.14%.

The difference between the two yields is the extra reward that we, stock market investors, demand for buying shares. The near 5% premium looks quite generous.

If safety is your investing objective, then paying S$107.48 for a 10-year Singapore bond today with a face value of $100 would be a safe option. After a decade, you should get back S$100 plus the $3 in interest payments that you earn annually.

But if we think we deserve better, then we could consider taking on extra risk.

Admittedly, volatility in the interim could result in our investments being worth less than our initial outlay. But history has shown that the odds are on our side, provided we are prepared to look to the long term.

Since 1994, the Straits Times Index has only ended lower on two occasions after every 10-year period. And that is before dividends are factored in. When dividends are included, investors have been ahead in all 13 of the 10-year periods.

That is why it is important to look to the long term.

In a perfect storm, just ask yourself whether companies such as Dairy Farm Holdings (SGX: D01), Sembcorp Industries (SGX: U96) and ComfortDelGro (SGX: C52) are likely to be bigger, stronger and healthier in 10 years’ time.

If you had asked the same question in 2005, answered in the affirmative and backed your hunches, you could have been between 2-1/2 times and five times richer as a result.

Investing can really be as simple as that.

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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 Director David Kuo doesn’t own shares in any companies mentioned.