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1 Bear Market Myth to Ignore if You Want to Invest Successfully

The Strait Times Index (SGX: ^STI), Singapore’s market benchmark, entered bear market territory on Monday when it dipped below 2,800 points and closed at 2,792.

A bear market’s defined as a market in which stocks drop 20% from a recent high. At 2,792, the Straits Times Index was 21.3% lower than a recent high of 3,550 that it reached this year.

When stocks are falling in times like these, it may not be uncommon to hear of market participants targeting random levels that the Straits Times Index must fall to – say, 2,600 points or 2,500 points – before they’d invest.

The implicit suggestion – and the myth to ignore – is that there’s a “good entry level” to invest in stocks as well as a “bad entry level.”

Thing is, the suggestion may be wrong.

A ‘good’ level of entry

The myth of the perfect entry point may be rooted in the very-human desire to avoid danger.

Some market participants fear that the stock market may continue to tank after they have invested their money. Thus, the search for the perfect entry point becomes an enticing idea. The problem is that no one knows where the market will head to next over the short-term.

In an article I wrote in late 2014, I noted that most of the top stock market strategists in Wall Street (the financial capital of the US) had predicted that the U.S. stock market will end 2015 with double digit gains.

While it’s not quite the end of the year yet, the actual results present quite the contrast. As of today, the S&P 500 (a widely-followed US stock market benchmark) is sitting nearly 7% lower compared to where it was at the start of the year.

Evidently, the best of the best market strategists did not see a market decline coming.

There is still hope

But not being able to foresee short-term declines does not mean that all hope’s lost. We can still invest very well even if we can’t buy at the lowest possible prices.

Back in 16 October 2008, Warren Buffett had penned an op-ed titled Buy American. I Am. In it, he detailed his thoughts on why he was buying shares at that time even though the mood was generally fearful. He wrote:

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.

So if you wait for the robins, spring will be over.”

Anyone who judged Buffett over the short-term would have thought he had lost his marbles – the S&P 500 actually went on to drop a further 28% from the day his article came out. But – but – Buffett’s decision was right over the longer term. The S&P 500, despite the recent market turmoil, is today still more than double where it was in 16 October 2008.

A Fool’s take

The example above shows how missing the perfect low in stock prices can still turn out to be all right over time. We may not need to enter and exit stocks at perfect points in order to invest successfully. Instead, we may want to focus on investing in good businesses with the aim of holding them for 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 company mentioned.