Shares of property developers fell sharply after the Singapore government announced new measures to cool down a heated property market.
The new set of rules include higher stamp duties and tighter requirements around the loan-to-value limits on residential property purchases. Before the implementation, the Monetary Authority of Singapore (MAS) had warned of “euphoria” and “excessive exuberance” in the property market.
Our FREE SGX stock pick!
As of 10:45 am today, shares of City Developments Limited (SGX: C09) and UOL Group Limited (SGX: U14) had fallen 15.8% and 12.5%, respectively. CapitaLand Limited‘s (SGX: C31) shares also dived 4.1%. Singapore’s banks, which provide housing loans, were not spared either. DBS Group Holdings Ltd (SGX: D05) fell almost 3% while its peers Oversea-Chinese Banking Corporation Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) dropped 2.6% and 3.3%, respectively.
As a whole, the Straits Times Index (SGX: ^STI) fell by over 2%, pushing Singapore’s stock market deeper into a market correction.
We Meet Again, Market Correction
A correction is often defined as a fall of 10% or more.
As it stands, Singapore’s stock market is down 12.4% from its high. The sharp decline sounds like a horrible thing to happen, but it also quite a common occurrence in the Singapore stock market. The diagram below shows the maximum decline from peak-to-trough for the Straits Times Index for each year between 1993 and 2016, a period of 24 years.
Source: S&P Global Market Intelligence
Here are some odds to chew on: Of the 24-year period above, all but three years saw a 10% decline or more. To simplify, nine out of every 10 years saw a more than 10% fall from peak-to-trough. That’s a high probability.
With that in mind, I would argue that investors should get comfortable with market corrections as it is likely to happen again in the future.
However, what should investors do in response?
Winning The Investing Game
We don’t have to look too far for inspiration. With the World Cup entering the quarter-final stages, this Warren Buffett quote is well-placed:
“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”
Imagine that you went to watch a World Cup football match in a packed stadium. And imagine that everyone was looking at the scoreboard rather than the match on the field.
That would be pretty odd, wouldn’t it?
But that’s kind of what is happening now. If investors keep their eyes glued to stock prices (the scoreboard), they are likely to miss the business developments that are happening within the companies (the football match itself). And as we all know, what happens on the field will eventually turn up on the scoreboard.
Likewise, we expect good business performances to result in higher stock prices over the long term.
A Foolish Take Away
It’s not to say that this approach is easy to swallow.
Your portfolio is tied to stock prices in the meantime, and the plunge will hurt in the short-term. But I submit that the best course of action is to keep our eyes on the underlying businesses, rather than on the movements of stock prices.
Crack open an annual report. Or go back and read up on a company’s latest earnings. I strongly believe that Foolish investors who can focus on the business rather than the stock price will come out ahead three to five years from now.
As our ex-Foolish colleague Morgan Housel once said:
Investing: every past crash viewed as an opportunity, every future crash viewed as a risk.
— Morgan Housel (@morganhousel) October 7, 2014
When you look back in the years ahead, would you have seen declines as a risk or as an opportunity? We favour the latter, of course.
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.
The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore has a recommendation for DBS Group and UOB. Motley Fool Singapore writer Chin Hui Leong doesn’t own shares in any companies mentioned.