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Invest When Others Are Fearful?

STI 1-year 31 Oct 2015

TL;DR: Valuation of a company depends on its cash generating ability. We shouldn’t confuse share price of a company with its value. Start valuing the businesses in your portfolio and focus on the long term. It is impossible to predict the direction of a share price over the short-term.

 

(From Motley Fool Singapore – David Kuo – 28 Oct 2015)

Why We Should Buy Shares Now

Let me take my tongue out of my cheek for a brief moment.

Last month, the title of one of our weekly Take Stock Singapore newsletters was a cheeky “Your Last Chance to Buy Cheap Stocks”.

At the time, the Straits Time Index closed at 2,928 points. Today it is some 5% higher.

Does that make us some kind of closet market-timer? Does it mean that we have privileged information into the direction of the market?

No it doesn’t.

Investors, not speculators

We, at the Motley Fool, are investors not speculators. Consequently, we are only interested in whether stocks are cheap or expensive. But even if we should reckon that a stock is inexpensive, it doesn’t mean that it can’t get any cheaper.

At a recent Securities Investor Association of Singapore (SIAS) panel discussion on the state of the Singapore market, a member of the audience asked: “Why should we buy stocks now, when we can buy them cheaper, later on?

He makes a valid point. But he is only right, if we can successfully time the market. As far as I know, nobody has been able to do that, consistently.

Peter Lynch, one of the greatest investors of our time once said: “There’s never been a market timer on the Forbes Rich list. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

Brainpower vs willpower

The reality is that we all have the brainpower to be successful investors. But whether we have the willpower is a different matter, altogether.

Time and again we see stock markets decline. We also see them recover, time after time.

But whilst stock market falls are a great opportunity for us to pick up bargains, many don’t.

Instead they find themselves caught up in pointless discussions about interest rates, the direction of various economies around the world, the price of oil, the price of fish, and where the stock market could be heading.

So, rather than fretting over things that we have no control over, we should instead be focussing on what is happening at the companies we invest in.

Correlation? What correlation?

It is important to remember that in the short term, there is no correlation between the success of a company’s operation and the success of its stock price. But in the long run, there is.

As investors, we should always focus on the long term. Trying to predict the direction of a share price over a couple of years, let alone over a few weeks and months, is nigh on impossible.

What’s more, we all have readily-available information at our fingertips. You and I have access to the same information. The key, though, is whether we choose to analyse the information rationally in valuing a business.

Value vs price

The valuation of a business depends on a number of factors. These include its ability to generate revenues; its ability to make profits and its ability to produce cash. You won’t find these in the share-price column of your daily paper, though many might think they can.

Perhaps one of the biggest mistakes that we can make as investors is to confuse the share price of a business with its value.

Warren Buffett once said: “After we have bought a stock, we should assume that they could close the market the next day and not reopen it for five years.”

He added: “As far as we are concerned, the stock market does not exist. Ignore it. Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

So start today, by valuing the businesses in your portfolios. Failing to do so is tantamount to playing mah-jong without looking at your tiles. That can never end well.

Pung or was that Kong! I don’t know – I didn’t look at my tiles!

 

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