Be Disciplined When Investing or You Might Just Regret It

Does valuation matter? Some might argue that if we are investing for the long-term and in companies with strong competitive advantages and business fundamentals, valuation might not be that important.

But is that really true? We can take a look at one blue chip stock in Singapore for some answers.

A 470% gain in 15 years…

If you had invested in bourse operator Singapore Exchange Limited (SGX: S68) since 1 January 2001, you would be sitting on a nice 470% gain today. And, that excludes any dividends you would have received along the way.

Moreover, it didn’t even matter when you had bought shares of the company. You would be making a profit from your investment if you had bought at any time between 2001 and 2006. But, the same can’t be said if you had invested in the company in 2007.

… followed by a loss of 50% in eight years

In 2007, Singapore’s stock market hit a peak late in the year before collapsing during the subsequent global financial crisis.

Singapore Exchange’s stock price closed at an all-time high of around S$16.40 in October 2007. If you had invested during that period and held on till today, you would be sitting on a loss of around 50% – even after eight years.

Why valuation is crucial

So what is wrong here? If we assume that Singapore Exchange is a stable and strong business with good growth prospects, why would we still be suffering a 50% loss in it after eight long years? This is where a look at Singapore Exchange’s valuation can give us some insight.


Source: S&P Capital IQ

Since 2010, we can see from the chart above that Singapore Exchange has had a price-to-normalised-earnings of around 25 to 40.

But between late 2006 and late 2007, the bourse operator was valued at more than 50 times its normalized earnings; the valuation multiple even reached a high of 75! That is nearly triple Singapore Exchange’s average price-to-normalised-earnings of 25 over the period stretching from 1997 to 2006.

Foolish Summary

Most of the time, when we are investing in good, reputable, and financially strong companies, the timing of our investment may not matter. So long as the business is growing, the share price would also appreciate over time.

But, we have to be alert for times when companies are trading at way above their typical valuation ranges. That’s especially so if their business fundamentals have not improved significantly. If we are able to avoid buying into a bubble, we can increase our odds of turning in better long-term results when investing.

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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 writer Stanley Lim does not own any companies mentioned above.