Just the other day, a friend from my office said: “Willie, if you think DBS will continue to be around for the next 15 years, then you should just buy today. The price is irrelevant.”
In other words, he was trying to tell me not to bother about the entry price when I buy DBS stock. Not sure where my friend heard that from, but shoot me in the head. Because if there’s an important lesson I’ve learnt over my last 16 years, the price you pay for a stock matters. Why?
Because you can still lose money buying high-quality investments. How would you know? Look at the price-to-book value ratio (PB ratio).
If DBS decides to shut down tomorrow, book value is what’s left after selling every asset and paying off all its debt. Now, how much would you pay for DBS’ book value? Some might say twice its book value. Some might say half its book value.
Are DBS shares a buy?
Over the last 20 years, the market was willing to pay an average price multiple of 1.4x book value, or 1.4x PB ratio. The higher a bank’s PB ratio, the more growth the market expects it to deliver.
In 2007, at the height of the raging bull market and just before the global financial crash, DBS shares were sitting at a peak of 2x book value. From there, the market decided DBS shouldn’t be worth that much – shares plunged over 60%. And guess what? It took the next ten years just for DBS to recover. During this time, no one wanted to buy DBS anymore.
Would you wait for another decade just to see your stock breakeven? I’m not so sure. I’m not so sure.
Today, DBS trades at a whopping 3x book value. This means, the market expects DBS to deliver explosive growth in the future. This is not all true. Let me explain.
I agree – the wealth management business is growing fast. But people have ignored the fact that DBS profits still come from selling traditional loans, which tends to have modest growth in an already developed economy like Singapore. What’s more, the loans business has been under margin pressure recently
I don’t have a crystal ball, but I’ve worked in the financial industry long enough to know markets can be emotional, but never dumb.
The big mistake investors often make
Here’s the other thing that matters: The big mistake investors often make in a surging market is thinking the momentum will never end. In this case, greed is overtaking fear. Today, DBS trades at all-time highs – its year-to-date performance delivered 36%, even beating the S&P 500 Index. It’s impressive.
In a strong bull market, everyone thinks they have the “Midas touch” on a stock. When that happens, I want to avoid that stock idea.
And at current DBS valuations, this is a warning bell to investors.
What I’m doing
DBS is one of my largest positions. I’ve accumulated my DBS shares at a very reasonable price years ago. That gives me a substantial margin of safety. Moreover, my dividend yield on cost is sufficient enough for me. There’s no reason to sell.
When my friend tells me I should just buy DBS shares just because it’s the largest bank in Singapore is only half true. My contrarian view on the stock today really depends on my entry price. And today’s entry price is not the price I’m willing to pay.
Benjamin Graham often said Mr. Market is manic-depressive. Some days it goes wild and offers you a price you have to ignore. Other days, it just offers you a price you just cannot refuse.
Today is not that day.
Previously, I’ve unpacked whether all 3 Singapore banks are a buy, hold or sell – watch them here.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
