Should You Buy Stocks After A Crash?
Every investor would have wondered when the best time for investing his or her money would be. Whether we are seeing a situation of stocks at all-time highs or all-time lows, or even suffering a sudden crash in prices, no one truly knows if that moment would be the best time to invest.
Understanding this, we take the “crash” of the Brexit as reference. Many of us would be asking ourselves if we should take this chance to invest. The answer could be agonizingly inconclusive, as we have to consider many factors to this question.
#1 Never Try To Catch A Falling Knife
This popular adage from Wall Street explains that doing so will only get you hurt.
The common misconception that fuels this mindset is that stocks that have fallen from a high will always eventually hit those highs again. A crash in prices of only a single stock should send alarm bells ringing in your head.
This usually happens because some insiders know of a coming doom and is selling down or its price is being suppressed by negative sentiments. A couple of case studies would be Straits Times Index components – Olam International and Noble Group.
Olam International
Noble Group
In these scenarios, we strictly look at events that happened post-2008 Global Financial Crisis.
The tail-end of 2012 for Olam Internation saw a dip when Muddy Waters issued a report warning that it could go belly up. Olam International’s share price nose-dived. In 2014, driven by a strong and strategic underlying business, Temasek led a consortium to purchase a majority stake in the Group. This boosted its share price.
In the second graph, Noble Group saw its share price tank in 2010. Then, again in 2011, 2014 and through 2015 and 2016.
These two graphs aptly show how investors seeking to buy on dips could suffer vastly different outcomes if they don’t have any fundamental reasons to buy the stocks.
#2 Trying To Achieve Dollar Cost Averaging
Averaging down is a sound fundamental concept for people trying to buy on dips. However, the concept of this remains that the investor buys regardless of whether there are rises or dips in price. This is unlike trying to average down, where you are punting that stocks that have gone down will go back up.
At the same time, investors should not be applying this investing method to just any stocks. Investors have to have solid reasons for wanting to buy a stock and then sticking to it for the long term by dollar cost averaging his investments.
This brings us to our next point.
#3 Buy Stocks You’re Willing To Keep For 30 Years
A Warren Buffett investing tip. This calls into question why investors put their money into certain investments in the first place.
The guiding principle should be that regardless of how the market does in the short term, this company is going to do well in the long term.
In Singapore, one common method to find such stocks should be to hone in on Temasek’s investment in them. Next, investors should ask themselves if this company has the potential to survive and thrive for the next 30 years.
If you ask us, there seems to be several such candidates in the Singapore context. Our list is led by Singapore Telecommunications (SingTel), Singapore Airlines and DBS Bank. There is also Singapore Press Holdings (SPH) and Keppel Corporation which are currently operating in tough markets, but they could be potential candidates for dollar cost averaging too.
#4 Recent Trends During Stock Market Crashes
Straits Times Index (STI)
For most investors, watching the stock market crash can be nerve-racking. This is why investors like us should focus on the long term and not worry over short term gains and losses.
Looking at the above benchmark graph, we highlight incidents where there were event driven crashes in the stock market.
There are two downward arrows early on – in 2000 and then again in 2001. This represents the Dot Com market crash in 2000 and the September 11 terrorist attack in 2001. Fast forward approximately five years ahead, and the stock market is trading above 2000 levels again.
In 2008, Lehman Brothers collapsed. The stock market was coming since before that, but Lehman Brothers’ bankruptcy pushed the stock market into pandemonium. Investors, no doubt, would have been sweating at this time. Again, five years on, in 2013, the stock market would have recovered above the price of when Lehman Brothers collapsed.
In 2011, the tsunami in Japan caused a slight crash in prices. By 2015, prices had recovered.
2015 saw the market crash again, this time led by the Fed’s decision to cut back on its Quantitative Easing programme and progressively increase interest rates. It remains to be seen whether markets will recover within four to five years.
Summary
The most important thing to consider as an investor is that we should not be led by greed or temptation to invest at any point in time. The motivating factor has to be proper research and solid long term fundamentals of a company. It is only by doing research, that we will understand opportunities to buy when prices of certain stocks dip in a crash over other stocks that deserve to be trading at lower levels.
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