At the time of writing, the Straits Times Index (SGX: ^STI) is up 20 points, or 0.7%, to 2,986. It could well be heading back towards the psychological level of 3,000.
The Singapore stock market may be taking a cue from the US stock market. Broad market indices in the US such as the Dow Jones Industrial Average and S&P 500 rose 1.8% and 1.6% respectively, on Tuesday.
However, I’m not all that excited about the rise in the stock market right now. You should not too, unless you are looking to sell all your stocks and grow your money for the long-term in another way.
The stock market has generally given higher returns than other assets such as bonds, gold, properties, and of course, our regular savings account. That’s why most of us should be investing in the stock market to build our wealth.
Those who had the conviction to invest in great companies throughout the 2008/2009 great financial crisis would have seen their money grow at a fast pace. Then, the Straits Times Index plunged by over 60% from peak-to-trough, and some of the rarest opportunities were given to investors on a silver platter.
During the depths of the crisis, banks such as United Overseas Bank Ltd (SGX: U11) and DBS Group Holdings Ltd (SGX: D05) were trading below their book values. Vehicular and non-vehicular testing company, VICOM Limited (SGX: V01), was selling at a trailing price-to-earnings ratio of around 9 in March 2009; its share price has increased by more than 300% since, and its PE ratio is now near 20.
There are stories abound of fundamentally-strong companies whose share prices were beaten down during the crisis 10 years ago, but have since gone on to recover.
When fear prevails, logic is thrown out of the window. As such, when the market throws a major tantrum, some shares will start trading below their intrinsic values. If we can identify them, we can grab the opportunity to invest. If the shares we already own are sitting on paper losses, and the reasons why we bought them in the first place are intact, we can look into buying even more of them. Who wouldn’t like a great stock market sale?
Taking a leaf from the Oracle of Omaha
One of the best investors in the world, Warren Buffett, shared the following comments in his 1997 letter to shareholders:
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.”
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
As Buffett quipped, if we are net savers, we should be excited only if share prices sink.
The stock market seems to be fearful now about the US-China trade conflict, rising interest rates, heightened geopolitical risk, and falling oil prices. We should be happy when stock prices fall, unless we are looking to sell all our investments and put our cash in Khong Guan biscuit tins to protect our wealth.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of VICOM Limited, United Overseas Bank Ltd and DBS Group Holdings Ltd. Motley Fool Singapore contributor Sudhan P owns shares in VICOM Limited.