October 11 2007 was a notable date in Singapore stock market history. That was the day when the Straits Times Index (SGX: ^STI) first hit 3,800 points. There were hopes at the time that it would reach 4,000 points. But it didn?t.
May 22, 2012 was another memorable date. On that day the benchmark index reached 3,453 points and appeared poised to not only breach its previous all-time high but also make another attempt to reach 4,000 points again. But it didn?t do either of those two things.
Today, at around 3,400 points, the Singapore stock market appears ready to…
October 11 2007 was a notable date in Singapore stock market history. That was the day when the Straits Times Index (SGX: ^STI) first hit 3,800 points. There were hopes at the time that it would reach 4,000 points. But it didn’t.
May 22, 2012 was another memorable date. On that day the benchmark index reached 3,453 points and appeared poised to not only breach its previous all-time high but also make another attempt to reach 4,000 points again. But it didn’t do either of those two things.
Today, at around 3,400 points, the Singapore stock market appears ready to attempt the impossible again.
Stock market bulls are hoping that the index will not only try to breach its previous highs but carry on rising. And it could.
The bears on the other hand are sceptical. They claim that it could all end in tears. That might happen too. They further claim that the STI has disappointed not just once but twice in the past and that it could let us down again.
It is important to bear in mind that the index is merely a number. On its own it is almost meaningless. It tells us nothing, if it even tells us anything at all.
The more important consideration for long-term investors is valuation. In other words, how much we are paying for every dollar of profit that Singapore companies make.
What really matters
Currently, the STI is valued at around 14 times historic earnings. In other words, investors are paying S$14 for every dollar of profit that Singapore companies made.
Put another way, if Singapore’s top 30 companies paid out all their profits as dividends, the earnings yield would be 7.1%.
To put that into perspective, if we instead lent money to the Singapore government for 10 years, we can expect a return of 2.3%, with little prospect that the income will rise. By comparison, Singapore companies could raise their payout as profits improve.
There is another thing to consider, too. The benchmark index is today lower than it was eight years ago. So, it is easy to assume that stock market investors have lost money over that time.
Not that bad
But that would be wrong. When dividends are included, the total annual returns since 2007 might have been disappointing, but definitely not loss-making. It was 1.3%.
Thai Beverage (SGX: Y92), which has also outperformed the market, is up 170% since the time when the STI came tantalisingly close to reaching 4,000 points. When dividends are included, the total return is a not-at-all insignificant 270%.
Nature of the beast
Of course many investors might have had a couple of property developers or farmers tucked away in their portfolios too. But even still, investors with a properly balanced portfolio of shares should have done very well over the last eight years.
Additionally, investors who bought more shares at a time of maximum pessimism in 2009 would have fared even better.
That is the key, if not the crucial point, about investing. The stock market will always have its ups and downs. That is the nature of the beast. However, it is important to never get scared out of investing.
The best time to invest is when the market looks darkest.
But if there is one thing that we have learnt, it is that even buying shares in good companies when the market is riding on the crest of a wave can pay off in the long run. That is because we invest in businesses and not the market.
A version of this article first appeared in the Independent on Sunday.
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