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Shares To Own In A Market Correction

Did you know that Thanksgiving Day in November, Harvest Festival in September and our Mid-Autumn Festival can trace their roots to farming? That’s the time of year when people who toiled the land would give thanks for their good harvests?

These days, though, the celebrations have less to do with ploughs, hoes, buffalos and combine-harvesters than a good excuse for family members to gather for dinner and give thanks for what we’ve got.

Christmas is a time for family celebrations, too.

Thank you, no thank you

But there doesn’t seem to be a whole bunch to celebrate right now, especially for us investors….

…. The days of rich pickings have been replaced by crumbling stock prices and a fear of what terrible things could lie ahead.

Thing is, over the last decade or so, it has been easy to make money in the market. Many of us could do it with our eyes shut.

Everything, it would seem, was a one-way bet. Bond investors, for example, were raking it in, as central banks around the world slashed interest rates to zero, and in some cases to less than nothing.

As interest rates fell, bond prices climbed. It was money for old rope, especially when the principal carried an implicit guarantee. Investors could be certain of getting back $1 for every dollar of bonds they bought, come what may.

And they didn’t even need to hold the bonds to maturity, either.

They could get out at any time they wanted, and still make a tidy capital gains, as bond prices rose when interest rates were cut. But those “easy money” days are over. Nothing much to be thankful for there.

Solid gold

The continual cut in interest rates benefitted gold investors, too. After all, there was nothing to be gained by leaving money in the bank. So, why not take a punt on the shiny metal.

As more people came to the same conclusion – helped, largely, by unwarranted fears over fiat currencies – gold prices soared. They shot up from around US$600 an ounce before the Great Financial Crisis to nearly US$1,800 an ounce. But not anymore.

Stock-market investors were raking it in too. It was hard to put a foot wrong as many stock markets around the world scaled dizzying heights. The Dow Jones Industrial Index rose from a Great Financial Crisis nadir of about 8,000 points to around 25,000 points….

…. The UK’s FTSE 100 index rose from below 4,000 points to within touching distance of 8,000 points. The story was virtually the same wherever we looked. Our Straits Timex Index (SGX: ^STI) doubled from a crisis low of about 1,500 points.

Pause for thought

The reason for the bounce is not hard to figure out – stocks were cheap. Put another way, the risk premium had widened. This premium is the extra returns that investors earn by putting their money into shares rather than leaving their money in the bank.

But the risk premium is narrowing, which is causing some investors to pause for thought. After all, the rise in US interest rates has given savers some respite from frozen deposit rates.

Unfortunately, even though bank interest rates are higher, they are still not quite good enough to preserve the real value of money, which is continually being eroded by inflation.

The good news

The good news is that as sellers leave the market, it creates more opportunities for us long-term buyers. And we don’t need to do anything whacky such as buy “pot shares” to grow our money.

We just need to look for companies that can grow, which in my case is their rising dividends, in a sustainable way.

We don’t need to find shares that will shoot the lights out. We don’t even need to buy shares with astronomically high yields.

We just need to find those companies that can grow and generate plenty of cash to cover their dividends. It is a strategy that has worked well for me.

Be thankful 

During the Great Financial Crisis, I was thankful to be able to buy dividends cheaply. As stock markets climbed, I was thankful to enjoy the rising dividends generated by the shares that I owned.

I am now thankful that I can again buy dividend-paying shares at reasonable prices, as stock markets correct.

So, there is always a reason to be thankful for investing in the stock market. You just need to know where to look. But more importantly, have the courage to buy when others are gripped by fear.

A version of this article first appeared in Take Stock Singapore.

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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.