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How To Get Rid Of That Sinking Feeling

Credit: Amy McTigue

Cheer up. It’s not the end of world, even though the Straits Times Index (SGX: ^STI) has lost around 20% of its value in the space of a few months.

It would seem that the much-vaunted, much-talked-about, China-inspired stock market rally has evaporated faster than a splash of water on a sizzling wok.

Hindsight is 20/20

With the benefit of hindsight, it would appear that it might have been a good idea to “Sell in May”. The first part of that old stock-market adage has proved to be true this year.

Since hitting a dizzying peak in the middle of June, the Shanghai Stock Exchange Composite Index has been on a one-way trip back down to Earth, save for a few brief interludes, when Chinese authorities made some futile and misguided attempts to prop it up.

The collapse in Chinese shares was not unwarranted, though. They were just too expensive. However, the subsequent dragging down of stock markets around the world was quite undeserved.

St. Leger beckons

Amusingly, the timing of China’s stock-market collapse could not have come at a better time, if you believe in stock market adages, that is.

The second part of the “Sell in May…” axiom states that we should not “…buy again until St. Leger day”. The St. Leger was last month.

But it is never a good idea to try to time the market. Market timing is a recipe for disaster – it is no more accurate than tossing a coin.

The more interesting question for us is whether we believe that stocks are cheap.

More questions than answers

Sure, there are questions about how quickly China’s economy could grow. Unfortunately, its numbers have raised more questions than answers.

Sure, there are also questions about whether the US Federal Reserve will increase interest rates. Your guess is as good as anyone else’s on that one.

However, neither of those issues should affect our decision to buy shares. Investing is not about buying a share in the morning, in the hope that it will go up by the afternoon.

Bargain shares

Warren Buffett once said: “Investing is an activity of forecasting the yield on an asset over the life of the asset.

So, the stock market merely gives us – all of us – an opportunity to buy assets that we reckon could deliver a stream of income from now to eternity. Over that time, the companies we invest in will inevitably be buffeted by events in the global economy, which are often not within their control.

Let us not forget that the market is only there as a convenient reference point. From time to time, it will expose anybody who is prepared to do anything rash.

The last few months were one of those times.

But take note – bargain-priced shares might not last for much longer. In the words of Peter Lynch: “It doesn’t take long for bargain hunters to find the bargains in the stock market these days. By the time they’re finished buying, the stocks aren’t bargains anymore.”

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock - Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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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.