MENU

Is It Time to Be Greedy in Singapore’s Stock Market?

Warren Buffett, one of the best investors the world has seen, has famously mentioned that the key to being successful in investing is to be greedy when others are fearful and be fearful when others are greedy.

With the recent rout that has plagued China’s stock market and the current crisis involving Greece and the rest of the Eurozone, is fear rampant in the market now? Or asked another way, is it time for us to be greedy with Singapore stocks?

The continuum of fear

As the stock market tends to follow the profitability of companies over the long term, a simple albeit imperfect way to value the stock market as a whole would be to use the price-to-earnings (PE) ratio of Singapore’s market benchmark, the Straits Times Index (SGX: ^STI).

At the Straits Times Index’s current level of 3,280 points, it has a PE ratio –  as measured using data from the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely mimics the fundamentals of the index – of around 13.2.

It is worth noting that this valuation is actually a slight discount to the index’s long-term average PE ratio; according to Reuters, the Straits Times Index’s average PE from 1993 to 2012 had been 16.6.

Yet, the Straits Times Index’s current valuation is also more than double what it was back during the trough of the global financial crisis in 2009. At the start of that year, the PE ratio of the index went down to just 6 and as we now know, that was a great time to be greedy (the Straits Times Index has gained nearly 90% in price since then).

So while the Straits Times Index may look a little cheap now in relation to its own history, its current valuation suggests that the current market environment is far less fearful than what was experienced during the global financial crisis more than six years ago.

The best course of action

Given what we’ve seen, it appears that the market’s only slightly pessimistic. So, how might investors proceed from here? Thing is, the best course of action now for long-term investors is the same course of action that is actually applicable all the time: Find great companies that will compound value for the long-term.

Such companies are usually ones with strong economic moats and a long runway for growth. Beyond that, these companies should also be trading at a price that’s significantly lower than their intrinsic values so that we can have a strong margin of safety in place.

As my colleague Chin Hui Leong has showed, when great companies are bought at reasonable valuations even when the market’s at a high, they can still become wonderful investments – that’s why the act of looking for value compounders at a price lower than their intrinsic value is an investor’s best course of action, all the time.

For more investing tips and tricks and to keep up to date on the latest financial and stock market news, sign up now for aFREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest,better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.