Are You The Kind Of Investor Who Would Lose Money In The Stock Market?

There are really only three groups of investors in the stock market: Those who manage to build wealth, those who scrape by with their portfolios unharmed, and those who lose their shirts.

Which group do you think you belong to? Here are some investors who belong to the third camp:

  • Those who bought Japanese stocks in the late 1980s. The Nikkei 225 Index, at its current level of around 18,500 points, is still over 50% lower than its all-time high reached in 1989.
  • Those who bought shares of Blumont Group Ltd (SGX: A33) in the third-quarter of 2013. The company’s shares reached a peak of S$2.45 each in late September that year. Today, Blumont’s shares are worth S$0.004 apiece (that’s not a typo – there are indeed two zeroes behind the decimal).
  • Those who bought shares of Jason Holdings Limited (SGX: 5I3) in mid-2015 when its shares were exchanging hands at a price of more than S$0.60 each. The company’s shares last closed at a price of S$0.06 (note the placement of the decimal) in January this year before trading was suspended.

You may not have noticed this, but the investors I brought up had all committed the same kind of investing-felony: They had ignored business fundamentals.

When Japan’s stock market reached its peak, stocks there were valued at nearly 100 times their inflation-adjusted 10-year average earnings. That’s a crazy number. For some perspective, Singapore’s Straits Times Index (SGX: ^STI) had an average Graham and Dodd price-to-earnings (PE) ratio of just 20.8 over the 30-year period stretching from December 1985 to December 2014. (The Graham and Dodd PE ratio uses a 10-year-average earnings figure that is not adjusted for inflation.)

In the case of Blumont, the company was valued at a ridiculous 500 times trailing earnings and 60 times book value near its share price peak.

Jason Holdings was similar. I had warned investors back in May 2015 that the company was carrying outrageous valuations: On 25 May 2015, Jason Holdings had a price-to-earnings ratio of 330 and a price-to-book ratio of 9.4.

Not every stock with a high valuation is an investing-disaster-in-the-making. But, the price to pay when you ignore business fundamentals can be very dear.

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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 Chong Ser Jing doesn't own shares in any company mentioned.