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Preparing For The Next Stock-Market Collapse?

I don’t normally like to think about bad things. I am the kind of person who looks at a half-filled glass and sees it neither as half-full nor half-empty. Instead, I want to know who made the glass, and whether it is a good business to invest in for the long term.

But I want to thank reader ktseng88 for raising the subject about the bursting of the next bubble.

It seems that no sooner have fears over the Greece debt-debacle subsided, than another potential tale of disaster waits in the wings. The red-faced Greece-naysayers are now quickly re-writing their doomsday scenarios, as they drool over the next possible Armageddon to scare us witless.

The next disaster

The next potential disaster could quite easily have been the collapse of the Shanghai and Shenzhen stock markets. But swift action (twice) by the authorities in China made sure that the stock-market drama did not turn into a full-scale crisis.

But make no mistake, Chinese shares – despite their sharp falls – are still overvalued. And in the absence of complete freedom to trade shares (both buying and selling, and not just buying), they are likely to remain overvalued.

Amusingly, China has been reproached from some quarters for copying developed economies’ playbook by making easy-money readily available. But the scale and manner of China’s intervention is staggering.

Can-kicking

The Eurozone, Japan and the US might be accused of kicking the can down the road but China has rolled its stock-market barrel down the expressway.

That is not the calamity that we are supposed to be bracing ourselves for, though. The next disaster, it would seem, is the Chinese debt bubble that is growing by the minute.

China’s total debt mountain, which includes government debt, corporate debt and household debt, reportedly, stood at US$28 trillion, as of last year. It is equivalent to nearly four times the total annual economic output of the country.

But opinions differ over whether China’s debt problem could derail the nascent global recovery, and send stock markets crashing.

Borrowing binge

On the one hand, so the argument goes, global financial crashes are often preceded by a borrowing binge. It happened to Japan in the 90s; it crushed many Asian economies in the 90s, and it brought both the US and the UK to their knees in the late 2000.

It is happening in China now. Over-indulging on debt has a lot to answer for.

The counter argument is that China does not resemble any of those previously-indebted economies. China has a vice-like grip on its banks; it has a choke-hold on its financial sector and it also has its stock markets in a full-Nelson.

Debt, it is argued, will never be allowed to go bad in China – it will simply be rolled over and over until it is either repaid slowly or conveniently forgotten. The latest jargon is “debt re-profiling”.

What if?

But don’t be too complacent, simply because China’s debt has yet to become a pressing issue. As soon as experts start to pay the “what-if” game, then almost anything could happen.

The “what-ifs” can quickly turn into “Why are still you holding onto risky assets such as shares”, as fretful traders dump stocks.

Perhaps one of the greatest truisms in investing is that people get interested in stocks when everyone else is. But the best time to get interested is when the converse is true – when no one else is interested. It is never easy to buy popular stocks and do well.

What’s more, there is nothing especially difficult about investing. All we need to do is buy good stocks at good times and hold on to them as long as they remain good businesses.

The best stocks

There are many of those types of good businesses in Singapore. They can be ideal investments for patient investors, who are prepared to continually add money to their chosen stocks.

Investing guru, Peter Lynch, once said that the best stocks to buy may be the ones you already own. So, a correction simply gives us the opportunity to buy more of the stocks that we like at a better price.

Our goal as investors should always be to buy, at a rational price, a share of a business whose profits are very likely to be higher in five, ten or twenty years’ time. Over that long time frame, though, we are likely to be rocked by many stock-market crashes and corrections.

But time and time again we see that the stock market behaves like a great relocation centre, where money is moved from the irrationally active to the sensibly patient.

In the end, it is neither the stock-market nor even the companies that determine our fate. Nor can stock market bubbles and stock-market crashes hurt us. Instead, it is us, and how we choose to react to them.

A version of this article first appeared in the Straits Times.

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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.