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2 Key Thoughts for the Current Bear Market

Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), closed below the 2,800 mark yesterday.

With that, the index is more than 20% lower than a 52-week high of 3,550 that it reached in April this year. It also represents an entry into bear market territory for Singapore’s stock market (a bear markets is defined as a market in which stocks have dropped by 20% or more from a recent high).

With a marauding bear in the market as a backdrop, I would like to offer a couple of thoughts for investors today.

1. The value of patience

It can be easy to feel fearful during bear markets. Seeing your portfolio in the red everyday can even feel like “death by a thousand cuts.” It can be very discouraging. Some may be even thinking of selling their stocks now and entering back only at a later stage.

But, it is crucial to keep the long-term in mind in times like these.

The Straits Times Index’s fall has occurred over a period of around five months so far. That’s hardly a fair duration to measure investing performance. Instead of five months, we might want to think of five years or more instead.

In a previous article of mine, I quoted Peter Lynch as saying that “the real money in stocks is made in the third, fourth and fifth year of your investment, because you are participating in the company’s earnings, which grow over time.”

Vehicle test inspection outfit Vicom Limited (SGX: V01) was used as an example in my aforementioned article. From 31 December 2004 to 31 December 2013, Vicom was a massive winner, with its shares up 410% in total in price alone. But in those ten years, there were two in which Vicom had actually clocked negative returns.

It’s only with the passage of time that Vicom, a remarkably stable and profitable business, delivered satisfying returns.

Yesterday, my fellow Fool Chong Ser Jing produced a great chart that had hospital and clinic operator Raffles Medical Group Ltd (SGX: R01) as the subject. It’s reproduced below:

Maximum drawdown for Raffles Medical Group, 2005 - 2014

Source: S&P Capital IQ

The chart plots the highest peak-to-trough loss (the maximum drawdown) that the company’s shares have suffered in each calendar year from 2005 to 2014. As you can see, there had been only one year out of 10 in which Raffles Medical’s maximum drawdown had been less than 10%.

And yet, as Ser Jing noted in his article, “Since the start of 2005, Raffles Medical Group has seen its earnings per share jump by 439%, leading to a massive 942% increase in share price over the same period.”

Patience does pay in investing – and it’s a trait that’s extremely important during chaotic times like bear markets.

2. Focus on business movements, not share price movements

It is also notable that there has been at most two quarters of earnings reported in the five months prior to today. As always, business developments are where we want to keep our eyes on – not share price movements.

Of course, some share price falls may be justifiable due to lower earnings. But others may not.

Observing how a company’s earnings per share and price to earnings ratio have changed could be one way to sieve out high-performing businesses which have been unfairly punished. I have been putting up a number of articles in this regard. Here are some samples:

Ultimately, the share price of a company will likely follow the direction of its earnings over the long haul. “If a business does well, the stock eventually follows,” Warren Buffett once said. The earlier examples of Vicom and Raffles Medical that I mentioned also shows that the long-term evolution of a stock’s business may be where you want to stay focused on.

I hope that you’d find these thoughts useful for your investing. A bear market isn’t easy to stomach, but hang in there, Fools!

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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 owns shares in Vicom Limited.