I was away for an overseas exercise for the past 3 weeks. The STI I last saw before I left was at 2966 and when I came back, it was at 2506. Almost a 9% decrease?!
With the existing all-time low interest rate being unable to boost the economy significantly, the central banks are slowly moving into the negative interest territory due to the market’s poor sentiments on the future returns.
Fortunately for Singapore, our government’s coffer is strong enough to temporary prop out demand via public spending. Hence, stemming any possible technical recessions. However, there will be limitations to what the government can do.
People are now willing to park their money in safe deposits for a penalty.
In or out during this Market Volatility
A bullish market always is heaven for a trader, but the market in a downturn can be a reality check. Singapore has been facing the pressure of the downturn and it reflects on the stock market. There were predictions that Singapore would go into a recession in 2016 because of dwindling growth in manufacturing and services sectors. Singapore’s GDP grew by a mere 2% in the end of 2015.
The Singapore STI Index has lost over 16% since March 2015. This clearly means a lot of Investor money has been wiped out in the past year.
The Singapore budget announced recently by Heng Swee Keat, the Finance Minister of Singapore, focused on addressing the problem of growth that has been the lowest in the past six years. A lot of measures were taken to boost growth, which is expected to be in the 1 – 3%.
What does this market mean for Investors and Traders?
A market volatility like this and the one during the 2008 recession have one thing common, it wipes out traders who do not invest based on fundamentals. If the stock market was such a bad place, then there wouldn’t be stock market billionaires like Warren Buffet and George Soros.
Every one of us must have heard the very popular phrase “Buy Low, Sell High”, but most do not follow this. A market that is crashing and going down is the perfect market to Invest in. The prices of shares of a company may fall, but that does not mean the company is performing badly. Market sentiments and the recession bring down the price of a share of a company, making it more a valuable purchase.
Do’s and Dont’s
- Do not sell in panic
When the market comes down steeply, the value of our holdings come down as well, and in this scenario most investors panic and sell. When you sell, you make a notional an actual loss. If the company in which you have shares seem to be doing fine, then the price of the share reflects a temporary lull. Don’t sell and incur huge losses.
- Do not trade.
A lot of traders will not appreciate this advice, but trading is very close to gambling because you don’t understand the basics of the company or the price you are paying for it. There can even be good companies in a bad recession, which means an investment in a good company during the recession could give you a very high ROI. Trading is based on short-term price movements, that is erratic and not based on any fundamental knowledge of a stock. When you Invest, you ask questions like, ‘Will this company still survive because of the product or service it’s offering?’. Some companies create products that are too much in need that’ll protect them from the vagaries of a volatile market.
- Do not look at the Stock Market movements daily.
A lot of traders make a huge mistake of watching the stock market movements daily. In a market that is bad, this can only bring your mood down and cloud your judgment. When irrationality takes over, then you make bad decisions.
Fundamentals of Investing
1. Always look for a bargain or value.
What if you could buy a brand new iPhone for a price of $300? Seems too good to be true. That is the case for fixed price products like an iPhone, but the stock market because of it’s corrections and sentiments affords this kind of discounted opportunities for investors. It’s always suggested to have cash to invest during a market that is going down. You can look out for valuable companies to invest in and get a bargain on the price you are paying. It is truly like getting an original Apple iPhone for $300.
A great example of value is the Jardine Cycle & Carriage Ltd. Just after the recession of 2008, the stock price of Jardine Cycle and Carriage hit an all-time low of $SGD 7.99 in 2nd March 2009. And in a few years time, the stock hit a price of $SGD 50.23 in 1st February 2012, exactly 3 years later. That is an increase of over 525%. This kind of return is unheard of. Taking advantage of the recession should be primary for every Investor.
There is a famous Warren Buffet quote, which goes like “Our favourite holding period is forever.”
When you buy stocks of fundamentally strong companies, that have a business advantage and has consistent buyers, then you are looking at a company that is going to grow. Business advantage can also mean a company that is a great brand or a company that has a special technology. A good dividend paying company in the long-term will add more wealth to your existing balance than trading ever can.
Recessions, on average will last for 4 to 5 years. This does not mean that every business will have to shut down, businesses will still run, and money will still be made. When you think long-term you are always looking beyond the recession in the market volatility.
Look out for signs of a good company
The recession is a great time to separate companies that are essential for companies that will go down during a downturn. As an investor, you need to look out for companies that are market leaders and are in areas that are consumer staples. A company that has a diversified portfolio of businesses in multiple Industries spread their risk.
Also, a sign of a good company is the one that pays dividends even during the recession.
Take a look at the image above, JCC has consistently provided dividends to its investors, not once, but twice a year. This is right during the recovery phase where companies are looking to conserve their cash.
A dividend paying company means that they are making profits and the excess profits are distributed to the investors.
Managing your Risk while Investing
Whenever you invest your money in the stock market, you take on a certain amount of risk. While there is no way to get around that risk, it is possible to manage your risk by educating yourself before you start trading.
One of the most important things to remember about any investment, is that if your capital is borrowed, you take on an even greater risk than the actual investment itself. It is never a good idea to borrow, either from a lending institution or from your credit cards, to come up with the money you need for any particular investment. This maximizes your risk in that, if the investment doesn’t pan out, you will still have to repay the amount you borrowed, and may even have to pay penalties depending on your financial position and ability to repay.
Make sure that before you start trading, you have planned ahead and set aside the capital you will need to invest. This will eliminate that third party, and ensure all of your profits will go in your pocket, and not some bank’s ledger. Keep in mind, though, not only will you need the money for your capital, but also for the most expensive part of the stock market – brokers fees.
While each broker will have different rates, most charge a flat fee per trade. These flat fees make it much easier to see a return on your investment much sooner than you would with a variable rate. This also means that, if you are starting with a fairly large investment of perhaps $10,000, and the brokers trading fee was a $100 flat rate per trade, you would only have to see a one percent return to break even. Of course the reverse is also true, in that if you are starting with a smaller investment of only $1000 or so, you would have to see at least a ten percent return to do the same.
Your rate of return will also depend on whether you are investing in a short term or long term system. In a short term system, you will have many more trading fees, since it is based on the buy low, sell high, do it now philosophy. With a long term system, however, you will incur far fewer trading fees due to the fact that with a long term investment, you are investing in the future viability of a company, rather than in an immediate merger or other change.
Managing your money wisely will help to manage your risk. But it is important to remember that even when your monetary risk has been considered, there is always the market risk. That is to say that there is always the chance that when you invest in the stock market today, there is no guarantee that the market will exist tomorrow. There are no guarantees in stock market trading, and there is no way to eliminate your risks entirely. But with good financial planning, and a little common sense, stock investments can be a wonderful way to provide money for your future.
Should one stay in or out of the current market?
The answer is to look for value. A market that has reached its peak is a bad time to invest because most stocks are overvalued. In markets that are falling, one can look for underpriced value stocks that will rise when the recession eases. One should not take decisions in panic and end up selling good stocks just because the pricing is going down. It may be an opportunity to acquire more of that good stock in this market volatility.
To summarise, stay in, if you want to Invest and stay out if you want to trade.