At the end of October 2019, I left The Motley Fool Singapore after nearly seven joyful years when the company ceased operations.
In May 2016, The Motley Fool Singapore launched its flagship investment newsletter, Stock Advisor Gold. I’m proud to say that as of 31 October 2019, Stock Advisor Gold had produced a return of 30.6% since the introduction of its first-ever recommendation on 20 May 2016. In comparison, the service’s benchmark, the S&P Global Broad Market Index – a measure for global stocks – had produced a gain of just 16.4% in the same period.
My ex-colleagues in Fool SG’s investing team and I essentially doubled the global stock market in around 3.5 years. I was there every step of the way, leading investing discussions, finding opportunities, dissecting the ideas, maintaining coverage on active recommendations, and more. Here’s how we did it.
The product
A description of Stock Advisor Gold helps set the stage for discussing the winning investing process.
Stock Advisor Gold gave one Singapore stock recommendation and one International stock recommendation every single month. It did so since its inception, come rain or shine. In all, we made 82 recommendations in Stock Advisor Gold.
The 30.6% return mentioned earlier is the simple average of the returns of all the recommended stocks in Stock Advisor Gold, and it includes dividends. Each time we make a recommendation, we also track the performance of the S&P Global BMI (again including dividends) – so the 16.4% performance number refers to the average return someone could theoretically earn if she bought the S&P Global BMI each time Stock Advisor Gold recommended a stock instead of buying the recommended pick.
Stock Advisor Gold’s recommendations typically had an investment time horizon of three years or longer. We were long-term investors.
3 lessons from our investment process
I see three key factors that contributed to our success.
#1 Flexibility
We were flexible in our investment thinking. I believe that investment consultants who try to style-box Stock Advisor Gold will be flummoxed. We had all kinds of stock recommendations in the service.
There was a special-situation: We judged that a transport operator had transformed from a capital-intensive business with no ability to match revenue with its costs into a capital-light cash-flow generating business that is now able to earn contracted revenues that are effectively on a cost-plus model. We had companies that own properties as their main business that are priced at massive discounts to the true market values of their real estate; and these companies came from both ends of the market-capitalisation spectrum. We had small-cap stocks with low valuations that are riding on the volatile but steadily-climbing growth of the world’s appetite for semiconductors and rubber gloves. We had large-cap stocks with high valuation multiples but solid profits and cash flows that are leading the way on trends with tremendous global growth opportunities, such as robotic surgery, DNA analysis, online travel, and more. We had small-cap Software-as-a-Service stocks that were loss-making and burning cash but that are building tremendously sticky and soon-to-be profitable customer bases.
I see our ability to find investment ideas from so many different corners of the market as a strength because it widened our opportunity-set tremendously. It also allowed us to develop a more expansive worldview, which sharpened our investment thinking.
#2 A focus on what matters
At Stock Advisor Gold, we glanced at macro-economics only occasionally – we had a laser-focus on business fundamentals. It was a company’s long-term business prospects in relation to its current stock price that guided our thinking on whether it was an attractive investment opportunity or not.
Let’s look at Netflix as an example (it was not a recommendation in Stock Advisor Gold). The trade war between the US and China has been and continues to be one of the biggest stories in the financial world. But will the squabbles between the two giant economies really quench the public’s appetite for high-quality video programmes that are available 24/7 for a low monthly fee? Will a trade war dampen Netflix’s desire to constantly improve the quality of its programming and streaming capabilities? I don’t think so. And it’s those two factors that really matter for the prospects of the company’s business.
Besides, the gap between a macroeconomic event and the movement of a company’s stock price can be a mile wide. For example, from 30 September 2005 to 15 September 2015, the per-ounce price of gold in Australia had grown by nearly 10% annually from A$621 to around A$1,550. But an index for Australian gold-mining stocks, the S&P / ASX All Ordinaries Gold Index, lost 4% per year in the same period, falling from 3,372 points to 2,245. In another example, despite stunning 15% annual GDP growth in China from 1992 to 2013, Chinese stocks actually fell by 2% per year; Mexico on the other hand, saw its stock market produce an annual gain of 18%, despite its economy growing at a pedestrian rate of just 2% per year.
#3 Being clear on the limits of our knowledge
We strived to be clear on what we did not know, and invested accordingly. We had no idea how commodity prices will move, so in Stock Advisor Gold, we stayed away from companies that we judged to be heavily dependent on commodity price movements for their revenues. We weren’t sure how interest rates would move, so we did not make any investment decisions that depended heavily on the movement of interest rates in certain directions.
Put another way, we aimed to be crystal clear on the limits of our knowledge, and we made sure we never overstepped the boundary. We had safeguarded ourselves against overconfidence.
Conclusion
In investing, the process is even more important than the results. That’s because results can be affected by luck. A bad break could momentarily cause a good process to produce poor results, but over time, the process will prevail. I’m glad that Stock Advisor Gold achieved excellent results with what I deem to be a sound process. I hope all of you who have read this article are able to take away something useful to improve your own investing process.
And if you happen to be an ex-member of Stock Advisor Gold or The Motley Fool Singapore, I thank you for your trust and your continued interest in following my investing thoughts.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.