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How to Act in Today’s Stock Market Environment

Some might say that Singapore’s stock market looks cheap in the current environment.

Here’s one measure: The SPDR STI ETF’s (SGX: ES3) PE ratio of 11.5 (as of 22 September 2015), compares favorably with the average PE ratio of around 17 that the Straits Times Index (SGX: ^STI) had carried from 1973 to 2010. (The SPDR STI ETF tracks the fundamentals of the Straits Times Index.)

Looking at the two aforementioned PE ratios implies that the stock market could be cheap now.

The difference between opinion and action

But, there is a big difference between having an opinion on valuation levels and trying to time your entries and exits in the stock market based on that. My fellow Fool, Morgan Housel, puts simply: Valuation is not a timing metric. It might be folly to try and time your stock market entry based on the broader market’s valuation.

Another Foolish colleague of mine, Chong Ser Jing, had recently shared a graph of the number of net-net shares that had appeared in the market over the past decade. The chart’s reproduced below:

Number of net-net shares in each quarter starting from 2005 (31 August 2015)

Source: S&P Capital IQ

A net-net share is one which has a market capitalisation that’s lower than its net current asset value. Theoretically, it implies a bargain stock. It follows that if there are more net-net shares available, the stock market could be cheaper.

With that in mind, we could say that stocks were “expensive” somewhere in mid-2011 when there were less net-net shares available.

But avoiding the stock market in mid-2011 may cause you to miss out on companies such as Hour Glass Ltd (SGX: AGS). The graph below shows how Hour Glass has grown its revenue and net income over the past decade:

Hour Glass's revenue and net profit

Source: S&P Capital IQ

Shares of the luxury watch purveyor had increased by 188% from 30 June 2011 up till yesterday with its top-line and bottom-line having experienced healthy growth over roughly the same time period as the chart above shows. For a stock market that could reasonably be deemed to be somewhat pricey at the time, Hour Glass’s shares have delivered a handsome return – in fact, it is a handsome return from any perspective.

As such, it may be more important to focus on an individual stock’s underlying business than to worry about the broader market’s valuation. Keeping your eyes on the right things may be what helps you beat the market over the long-term.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.