Preparing for the next stock-market collapse?

Markets or companies don't determine our fate - it is how we react to their movements

China's total debt mountain, which includes government, corporate and household debts, reportedly stood at US$28 trillion (S$38.4 trillion) last year.
China's total debt mountain, which includes government, corporate and household debts, reportedly stood at US$28 trillion (S$38.4 trillion) last year.PHOTO: REUTERS

I don't normally like to think about bad things. I am the kind of person who looks at a half-filled glass and sees it neither as half-full nor half-empty. Instead, I want to know who made the glass and whether it is a good business to invest in for the long term.

But I want to thank (reader) ktseng88 for raising the subject to me about the bursting of the next bubble. It seems that no sooner have fears over the Greece debt debacle subsided than another potential tale of disaster waits in the wings. The red-faced Greece-naysayers are now quickly re-writing their doomsday scenarios as they drool over the next possible Armageddon to scare us witless.

The next potential disaster could quite easily have been the collapse of the Shanghai and Shenzhen stock markets. But swift action (twice) by the China authorities made sure that the drama did not turn into a full-scale crisis. Chinese shares - despite their sharp falls - are still overvalued. And, in the absence of complete freedom to trade shares, they are likely to remain overvalued.

Amusingly, China has been reproached by some quarters for copying developed economies' playbook by making easy money readily available. But the scale and manner of China's intervention is staggering. The euro zone, Japan and the United States might be accused of kicking the can down the road but China has rolled its stock-market barrel down the expressway. However, that is not the calamity that we are supposed to be bracing ourselves for. The next disaster, it would seem, is the Chinese debt bubble that is growing by the minute.

China's total debt mountain, which includes government, corporate and household debts, reportedly stood at US$28 trillion (S$38.4 trillion) last year . It is equivalent to nearly four times the country's total annual economic output. But opinions differ over whether China's debt problem could derail the nascent global recovery and send stocks crashing.

On the one hand, so the argument goes, global financial crashes are often preceded by a borrowing binge. It happened to Japan in the 1990s; it crushed many Asian economies in the same decadeand it brought the US and the United Kingdom to their knees in the late 2000s. It is happening in China now.

However, the counter-argument is that China does not resemble any of those previously indebted economies. It has a vice-like grip on banks; it has a chokehold on its financial sector and it also has its stock markets in a full nelson. Debt, it is argued, will never be allowed to go bad in China - it will simply be rolled over until it is repaid slowly or conveniently forgotten. The latest jargon is "debt re-profiling".

But don't be too complacent just because China's debt has yet to become a pressing issue. As soon as experts start to play the "what-if" game, almost anything can happen. The "what-ifs" can quickly turn into "Why are still you holding onto risky assets such as shares" as fretful traders dump stocks.

Perhaps one of the greatest truisms in investing is that people get interested in stocks when everyone else is. But the best time to get interested is when no one else is interested. It is never easy to buy popular stocks and do well.

What's more, there is nothing especially difficult about investing. All we need to do is buy good stocks in good times and hold on to them as long as they remain good businesses. There are many of those types of good businesses in Singapore. They can be ideal investments for patient investors who are prepared to continually add money to their chosen stocks.

Investing guru Peter Lynch once said that the best stocks to buy may be the ones you already own. So a correction simply gives us the opportunity to buy more of the stocks that we like at a better price.

Our goal as investors should always be to buy, at a rational price, a share of a business whose profits are very likely to be higher in five, 10 or 20 years. Over that long time frame, though, we are likely to be rocked by many stock-market crashes and corrections.

But time and time again we see that the stock market behaves like a great relocation centre, where money is moved from the irrationally active to the sensibly patient. In the end, it is not the stock market or even the companies that determine our fate. Neither can stock-market bubbles and crashes hurt us. It is us and how we choose to react to them.

A version of this article appeared in the print edition of The Straits Times on August 03, 2015, with the headline 'Preparing for the next stock-market collapse?'. Print Edition | Subscribe