When someone asked J.P. Morgan what the stock market would do next, the reply was “It will fluctuate.” Get the message? No one, not even the rare geniuses of the financial world, can deliver precise answers. Motley Fool sheds some insight into the practice of trying to look into a crystal ball and timing the market, and their take on when the right time is to invest:
There’s a question I get asked quite often because of the nature of my job as an investment writer, “Is this a good time to buy shares? The stock market’s dropping/rising/stagnant/rising like a rocket/sinking like a stone lately.” Did I just describe all the ways that the stock market can conceivably act at any given time?
The thing is, the stock market’s affected by the moods of the ‘investing’ (however loosely that term is used) public in the short-term. Benjamin Graham, author of the seminal investing book The Intelligent Investor, puts it succinctly – The market is a voting machine in the short term but a weighing machine in the long term.
When the public feels good about the stock market, it becomes popular and prices become buoyant in the short-term – hence the voting machine. But over the long term, stock prices are largely determined by the corporate performance of the businesses underlying those stocks – hence the weighing machine.
This Time’s a Good Time as Any
The Straits Times Index’s (SGX: ^STI) recent performance certainly qualifies as a ‘dropping market’ – at 3,242 currently, the index is now off its 22 May 2013 52-week high of 3,465 by 6.4%. Putting the point level of the index aside, what are its underlying fundamentals?
We could use the SPDR STI ETF’s (SGX: ES3) data as a close proxy for the STI as the former is designed to track the movements of the latter as closely as possible.
Using data compiled from Morningstar and SPDR STI ETF’s own website, the ETF’s projected to have long-term earnings growth of 6.2% and a current dividend yield of 1.2%. Add those two figures up and investors will be looking at long-term annual returns of slightly more than 7% at a Price-Earnings multiple of 13.3.
Now, here’s the thing. Is this a return worth-paying for? Ultimately, the decision boils down to the individual investor’s assessment of the credibility of the earnings growth assumption, the stability of future dividends, and whether the multiple that investors are willing to pay for the STI’s earnings will be higher or lower in the future.
At any point in time in the future, if such an assessment ends in a thumbs-up, then it’s a good time to invest as any.
Any Way You Slice or Dice It, It Remains the Same
We’ve been discussing this in the context of the broader market, but it can certainly be used for individual companies as well. Let’s take telecommunication operators Starhub (SGX: CC3) and SingTel (SGX: Z74), selling for $4.31 and $3.85 currently, as examples.
Is it a good time to invest in them as solid dividend plays with their above average yields of 4.6% and 4.4% (based on the full-year pay-out for their last completed financial years) respectively? Well, we could study their business and make reasonable guesstimates on the stability of their cash flows and using that as an anchor for making an investment decision.
That way, we can ground our decisions on something concrete (the business fundamentals) and not leave us floating around helplessly with something as fleeting and capricious as market psychology.
Foolish Bottom Line
Benjamin Graham’s framework of thinking about the stock market using the ‘voting machine’ and ‘weighing machine’ analogy has been one of the bedrock principles of American investor Warren Buffett, who has amassed a personal fortune north of US$50b by investing using said principles.
The next time you find yourself asking, ‘Is this a good time to invest?’, start leafing through a company’s annual report and look at its business. When business value is greater than price, that’s a good time to invest, regardless of what the market will be doing in the next few days, weeks, or months.
By Ser Jing Chong
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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 contributor Chong Ser Jing doesn’t own shares in any companies mentioned.
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