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Invest Based On Value and Not Sentiment
September 30, 2011

You may not realise that your sentiment-driven behavior has unconsciously influenced you to buy high and sell low. Find out how you can avoid making such a sentiment-driven investment decision during a volatile market condition.


Author : iFAST



 Invest Based On Value and Not Sentiment

Your Behavior Has Unconsciously Caused You To BUY HIGH And SELL LOW

The relentless European debt crisis continues to lead the global equity markets to nowhere. Weak sentiment has dominated lately and we see panic selling setting in. Under such a volatile market condition, it is very important for investors to distinguish between the price and value of a given market. If we write the relationship between price and value over the short-to-medium term as a mathematics equation, it will be:

Price = Value + Sentiment

The price of a market tends to be elevated when sentiment is strong (e.g. during a bull market) but suppressed when sentiment is weak (e.g. during a bear market). This is because in general, investors’ willingness to buy tends to increase when sentiment is strong, despite the risk that the market is overvalued. Willingness to buy decreases and willingness to sell heightens (panic selling sets in) when sentiment is weak, although the market may probably be much undervalued.
As a result, investors who are typically sentiment driven have a very high risk of buying high and selling low.

3 Rules To Avoid Sentiment-Driven Investment Decisions

Rule 1: Prolong your investment horizon to a longer-term (e.g. 3 – 5 years or 5 -10 years).
Wishing to gain positive returns over a short investment horizon by frequent transactions is SPECULATION and not investment. If you know that the fundamentals of your investment justify a higher valuation over the long-term, you need not worry so much about the short-term price fluctuations. This is because over the long-term, value drives price.

Rule 2: Screen out headwinds and noises that cause short-term volatility but with no impairment to the long-term prospects.
The markets are full of good and bad news everyday that can influence investors’ sentiment. Identify the actual events that affect the long-term fundamentals and prospects of your investments.

Rule 3: Stay focused on the value of the underlying assets/markets that you wish to invest in.
Use valuations such as PE ratio to guide you on what to buy and what to avoid. Do not panic when markets crash. Focus on the value because when there is panic, the fundamentals may not be affected but prices could be suppressed. These could be buying opportunities for those who willing to see past the market crash and ride through the market volatility.

Conclusion

The price of an asset always fluctuates around its underlying value because of fear and greed. When market sentiment is weak, like the current situation and also during the global financial crisis in 2008, markets are likely to be undervalued after the major sell-off and hence, it pays off to keep an eye on valuations.
Based on our recent review of the current turmoil, we have upgraded the ratings of the following markets to 5 stars for their significant undervaluation after the recent sell-off. As a value investor, these are the markets that you should not overlook now.

The 5 Stars Markets:

  • Emerging Markets
  • Asia ex-Japan
  • Greater China (China, Hong Kong, Taiwan)

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Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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