How To Hunt For Share Bargains

In just a few months’ time, my favourite “go-to” shopping mall for all things electronic will no longer be around. It is sad but true.

Funan DigitalLife Mall, which has been around for more than 30 years, will close for redevelopment in September. It could take around three years before the new centre will be built.

Some shopkeepers have already started to wind down their operations, with the almost obligatory “relocation sales” at some outlets in full swing.

Some shop owners have even drafted in extra staff at the weekends to cope with the increase in the number of bargain hunters that have descended on the mall, in search of cut-price deals.

Ridiculously cheap

I was unfortunate enough to be caught up in one of those melees. It was not a pleasant experience being elbowed in the tripod department.

What’s more, some of the things that I wanted to buy were not even available on the sorry-looking, near-depleted shelves. Additionally, there was a whole bunch of stuff that I would never buy in a month of Sundays.

Something similar happens in the stock market.

There are moments of madness in the stock market when stock prices could fall quite sharply. The Straits Times Index (SGX: ^STI) has fallen 8% from a recent high that was within touching distance of 3,000 points. So, some stocks that were once trading at high prices could become temptingly cheap.

But it is important to always distinguish between the price of a stock and its value. The two are not the same. Cheap rubbish is still rubbish.

Price and value

The price of a stock is simply the amount of money that people are collectively willing to pay for the asset.

In times of market euphoria, they might be willing to pay significantly over the odds for the stock. But in a market downturn, their sentiment could change abruptly. Consequently, prices could fall precipitously.

So something that was once the toast of the market could turn to toast, quite quickly.

But regardless of whether the price of a stock goes up or comes down, we need to always think like an investor.

Warren Buffett once said: “The dumbest reason in the world to buy a stock is because it is going up.” He is right.

But it is important to bear in mind that the opposite may not always hold true.

Just because a stock price has fallen – even severely – may not automatically make it cheap.

That can be a difficult concept to grasp.

Attractive valuations

For instance, stocks that have fallen in price by half do not immediately become twice as attractive. They might not even be attractively valued at all.

The key to investing is to be able to predict with some degree of certainty the future of a business. If the future cannot be predicted, it cannot be valued.

In order to value a stock, we must be able to estimate the yield on the asset over the life of the asset.

In other words, we have to be able to forecast – with some degree of certainty – the profits and the cash flow that a company could deliver from now to infinity.

Otherwise, investing would be no better than trying to forecast the psychology of the market.

There is something else to consider too. If you can’t find any companies that you think are attractive, leave your money in the bank until you discover some.

It can sometimes be a hard to do nothing. But we are paid for being right, not for being active.

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.