What the Great Singapore Sale Has In Common With Investing

If you have gone out shopping over the past month, you would have noticed many retailers giving massive discounts – that’s because we’re in the midst of the annual Great Singapore Sale (GSS) which takes place from May to July.

For many ladies, this is probably their favourite time of the year as they can finally open their purse strings and buy all their favourite things on the cheap.

But why am I talking about a shopping sale here at The Motley Fool Singapore? That’s because of one important lesson investors can learn from lady shoppers during the GSS.

When shopping, it’s often the case where ladies know the actual cost of a bag, a pair of shoes, or a dress, and how much of a discount would be enough to make these an appealing bargain. And if the bargain’s sufficient, the shopping is usually done in force – the cheaper the bag, shoe, or dress is, the more they’re coveted by shoppers.

Investors can gain a lot by learning from that example. Bargains in the stock market appear when a share’s trading at a price less than its intrinsic value and such situations can surface from time to time, especially during market panics.

The sad difference between investors and shoppers is that nobody wants to invest when bargains are available.

Here’s a good example taken from slides (see slide 15) prepared by my colleague Morgan Housel in the U.S.: When stocks were expensive in 2007, investors had plonked in US$85 billion into stock mutual funds (mutual funds in the U.S. are analogous to unit trusts here); in 2008 and 2009, when stocks were cheap, US$230 billion was yanked out of stock funds.

This counter-productive investing behaviour can be extremely destructive to your wealth. To help mitigate the problem, here’re some steps you can take:

1. Know what a bargain looks like. The following’s certainly not the only way you can know if a share’s a bargain and it’s also not fool-proof, but it can be a good starting point in developing a good feel for what bargains look like.

Banking outfit Oversea-Chinese Banking Corp Limited (SGX: O39) was trading at S$3.95 on 9 March 2009, its low during the Great Financial Crisis. At the price, OCBC was valued at just 0.88 times its book value.

Investors who were looking at the bank back then might have come to the conclusion that it was a bargain given two important facts: 1) In the decade ended February 2009, OCBC had an average price-to-book (PB) ratio of 1.68; and 2) the bank was still generating solid profits and returns on equity even in 2007 and 2008 (see chart below), suggesting that it has a strong banking business that could hold up even in the face of the tough times seen in the crisis period.

OCBC’s worth north of S$10 a pop today, representing a gain of 150% in slightly more than six years.
OCBC's profit and returns on equity
Source: S&P Capital IQ

2. Prepare a wish-list of shares which you’d want to purchase at bargain prices. When you have a better handle of what a bargain may or may not look like, you can then start preparing your wish-list of shares. When a financial or market panic hits and those prices are reached, pull out the list and start buying. Having such a list can also provide you with some emotional stability and help you overcome the fear of buying which can be prevalent during times of market stress.

Benjamin Graham, the intellectual father of value investing, once quipped that we should shop for common stocks the same way that we buy groceries. In other words, he was saying we should really invest in the same manner as we do when we shop – and that is, to buy more when our favourite goods are sold cheaply.

By having a good idea on how to spot bargains and then taking advantage of them when they appear, your investment dollars could give you more bang for the buck in time to come.

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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 James Yeo owns shares in Oversea-Chinese Banking Corporation.