[12 Feb 2014] To wait or to buy?

In terms of STI, market has lost about 5% since the beginning of the year. When the market is sliding, a very common question among investors is this: “Should I buy or should I wait for market to go lower?” I must say this is one of the toughest question and would think that there are no perfect answer to this question. I will just share my personal view to this for your reference. Whether I am right or wrong, guess time will tell!

 

This is the exact question I have when STI breaks the 3,000 support level. In doing my analysis on whether to buy or not, I first ask myself this question: “is the dropped supported by economic occurrence”? As a Fundamental Analyst, I believe in using economic occurrence to justify for any drop or increase. For this episode, I personally don’t find any compelling reason for the market to correct so sharply at least from the economic perspective. Yes there are some bad news: China PMI not doing well and some negative stories about the emerging markets. But, I see that such stories pale in comparison to the recovery stories that we are getting from US and Europe. In short, I don’t believe that the drop is justifiable by what is happening in the global economy.

 

The next thing is about mindset. Should I buy when the stocks are at its lowest price or should buy when they are cheap? Of course, all of us will prefer the former, which is to buy at the lowest price. But unfortunately, I don’t think that there is any science, methodology or process today to help us do that. My experience has taught me that if I choose to have the mindset of buying at the lowest, I eventually will not buy anything at all! Hence, I have adopted the mindset of buying when the stocks are proven to be cheap. To mitigate the risk of price falling further after my purchase, I am prepared to hold the stocks I purchase for long term. Hence, if my valuation of the stock is correct, eventually I will still profit from the stock.

 

Now let’s come to the main crux of my answer, so are there stocks cheap enough? My answer was YES when STI was below 3,000. I did buy something but of course you should know by now I can’t disclose! J But of course, I can share with you how I pick up some of the stocks.

 

In this episode, I basically use Price to Book ratio (P/B) to help me sift out cheap stocks. Just a recap, Book value is basically when the accountant says how much the company is worth. For example, if we have a P/B of 0.7 and assuming that the accountant’s valuation is correct, you will be using $0.70 to buy $1 worth of equity, which of course is quite a good deal. Please remember the pitfall for using this valuation methodology, which is book value may not equals to market value. We should only use such valuation for companies whereby most of the assets are inventories as the value quoted is more likely to be similar to market value.

 

To me, for large companies with sound business model and healthy financials, a P/B of < 0.7 is cheap. With the help of the stock screener (the one in SGX my gateway of course, www.sgx.com/mygateway) you could sift out the likely candidates by setting a P/B of 0.7, mid and large cap companies (see pic)

 

With this 19 counters, I will perform my stock pick process which is business analysis > financial statement analysis > pricing analysis > risk analysis. When they pass all the test, it may be worth investing!

 

To wait or to buy? Hope my answer can give you some reference!screener