The Incredibly Resilient Stock Market

Despite wars, hyperinflation, vengeful enemies, and a despotic dictator, Germany’s stock market has displayed incredible resilience.

The stock market is an incredibly resilient thing. A wonderful example can be seen through some astounding facts I found out earlier this year about Germany’s stock market, courtesy of a blog post from investor Anthony Isola. 

Germany lost World War I, which lasted from 1914 to 1918, and signed the infamous Treaty of Versailles. The peace agreement placed usurious repayment demands on Germany, which resulted in hyperinflation in the country and the ruin of her economy in the 1920s. This paved the way for Adolf Hitler’s rise to power in Germany in the early 1930s. After Hitler’s ascension, he dragged the globe into World War II, starting with his invasion of Poland in 1939. During the war, Germany suffered decimating air raids on its cities conducted by the Allied nations and by 1945 she had lost the war. Here’s how Germany’s stock market did from 1930 to 1950:

Source: Anthony Isola

Unsurprisingly, German stocks were smashed shortly after World War II ended. But what happened next was remarkable. Germany managed to rebuild, as the victors decided to support the country’s rehabilitation rather than punitively punishing her as they had done in the aftermath of World War I. Germany’s stock market rebounded, and then some. Isola wrote:

“Amazingly despite losing not one but two World Wars, suffering a vicious bout of wealth destruction due to Hyperinflation, experiencing a Great Depression, and living under the rule of a fanatically evil dictatorship,  long-term German investors realized positive returns by 1960. The German market’s real return compounded at an annual rate of 2.4% from 1900-1960. From 1950 to 2000, German stocks posted an annual real return of 9.1%.”

So even after accounting for inflation – and bear in mind that Germany endured hyperinflation in the 1920s because of theTreaty of Versailles – German stocks still generated a return of 2.4% per year from 1900 to 1960. Here’s a chart from Isola’s blog post that shows the performance of Germany stock’s market from 1870 to 1994:

Source: Anthony Isola

In his blog post, Isola also wrote that “stock markets can be way more resilient than you can imagine. Provided you have the luxury of time to work in your favor.” This is why Jeremy and I are long-term investors. We want time to be on our side.


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.I have no vested interest in any company mentioned. Holdings are subject to change at any time.

The Dogs of The Stock Market

Watching a lady walk her dog can teach us so much about the stock market.

Note: Data as of 2 November 2021; an earlier version of this article was first published in The Business Times on 10 November 2021

There are 7.9 billion individuals in the global economy today. According to the World Federation of Exchanges, an association for exchanges and clearing houses, there are at least 47,919 companies listed in stock exchanges around the world. Estimates on the number of small/medium enterprises (SMEs) worldwide vary widely, but the ones I’ve seen peg the number at between 213 million to 400 million. 

There is also a litany of problems currently plaguing our globe. The legendary US-based investor, Bill Miller, provided a list of worries in his latest 2021 third-quarter letter: “Today’s worries include, but are not limited to, China’s regulatory actions, high and rising fuel and food prices, labor shortages, inflation or stagflation, the effect of Federal Reserve tapering, disrupted supply chains, potential default due the debt limit standoff and the ongoing dis-function and polarization in Washington.” These are in addition to the ongoing COVID-19 pandemic.

With the statistics and information in the first two paragraphs above, it’s an understatement to say that the business world, and hence the financial markets, involve a lot of moving parts. This is a problem for investors and begets the question: What should investors be watching now?

A walk in the park

There was once a lady who liked to walk her young dog each morning in East Coast Park using a very long leash. The lady would take a 10 kilometre stroll from one point in the park to another, walking at a steady pace of five kilometres per hour.

Her dog was always easily excitable. It would dart all over the place, diving into a bush here, and chasing after something there. You could never guess where the dog would be from one minute to the next.

But over the course of the two hour stroll, you can be certain that the dog is heading east at five kilometers per hour. What’s interesting here is that almost nobody is watching the lady. Instead, their eyes are fixed on the dog. 

The tale of the lady and her dog is actually an analogy about the stock market that I’ve adapted from Ralph Wagner, a highly successful fund manager with an amazing wit who was active from the 1970s to the early 2000s. If you missed the analogy, the dog represents stock prices while the lady represents the stocks’ underlying businesses.

It’s the business

There are many ways to slice the dice when it comes to making money in the stock market. But one way is to watch the lady (businesses) and not the dog (stock prices). No matter where the dog is leaping toward, it will still end up at one point in East Coast Park after two hours, following the lady’s path.

The US-based Berkshire Hathaway is the investment conglomerate of Warren Buffett, who is arguably the best investor the world has seen. In his 1994 Berkshire shareholders’ letter, Buffett shared a long list of problems that the USA and the world had faced over the past three decades: 

“Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.”

But in the same period – 1965 to 1994 – Berkshire’s share price was up by 28% annually. This is the dog. What about the lady? Through shrewd investments in stocks and acquisitions of private companies, Buffett grew Berkshire’s book value per share by 23% per year from 1965 to 1994. Over 30 years of numerous geopolitical and macroeconomic problems, a 23% input of business growth had led to a 28% output of share price growth. 

It’s worth pointing out that Berkshire’s share price and book value per share did not move in lock-step. For example, Berkshire’s share price fell by 49% in 1974 despite a 6% increase in its book value per share. In 1985, a 94% jump in the share price was accompanied by book value growth of ‘only’ 48%. In another instance, Berkshire’s share price slid by 23% in 1990 even though the book value was up by 7%.

Berkshire is a great example of how the excitable dog will end up wherever the lady goes, even though it may be leaping all over the place en route. Berkshire is also, by no means, an isolated case.

The Nobel Prize-winning economist Robert Shiller maintains a database on the prices, earnings, and valuations for US stocks going back to the 1870s. From 1965 to 1994, the S&P 500, a broad stock market index in the USA, experienced a 6% annual increase in both its price and earnings, according to Shiller’s data.

At this point, some of you may wonder: Why are there some amazing dog-owners who are able to continue marching forward, despite the many obstacles they face? 

Optimism

One of my favourite pieces of business writing comes from Morgan Housel, a partner at the venture capital firm Collaborative Fund. It’s an article titled “An Honest Business News Update” published in August 2017 on Collaborative Fund’s website. Housel wrote:

“The S&P 500 closed at a new high on Wednesday in what analysts hailed as the accumulated result of several hundred million people waking up every morning hoping to solve problems and improve their lives…

…Fifty-five million American children went to school Wednesday morning, leveraging the compounded knowledge of all previous generations. Analysts expect this to lead to a new generation of doctors, engineers, and problem solvers more advanced than any other in history. “This just keeps happening over and over again,” one analyst said. “Progress for one group becomes a new baseline for the next, and it grows from there.””

This is why there are these amazing dog-owners: Because humanity’s story is one long-arc of progress. The arc is punctuated from time to time by disasters – of the self-inflicted and/or natural variety – but our human resilience and ingenuity helped us to pick up the pieces and move on. It took us only 66 years to go from the first demonstration of manned flight by the Wright brothers at Kitty Hawk in 1903, to putting a man on the moon in 1969. But in between was World War II, a brutal battle across the globe from 1939 to 1945 that killed an estimated 66 million.

At the start of this article, I mentioned that there are 7.9 billion people in the world today. The vast majority of us will wake up every morning wanting to improve the world and our own lot in life – this is ultimately what fuels the global economy and financial markets. This is the lady, walking steadfastly ahead, holding her dog on a long leash. And this is ultimately what investors should be watching.


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. I have no vested interest in any company mentioned. Holdings are subject to change at any time.

Investing Thoughts After Watching Hometown Cha Cha Cha

This heartwarming, heartbreaking, and funny drama contains two investing lessons that we can learn from and apply.

Note: This article contains major spoilers for the popular Korean drama Hometown Cha Cha Cha. If you’re still watching the show or plan to watch it in the future, read this at your own peril! (You can always read this article after watching the show though!)

Together with my wife, I recently finished viewing a new Korean show, Hometown Cha Cha Cha, on Netflix. Thanks to her prodding, I discovered a series that I thoroughly enjoyed – it was not only heartwarming, heartbreaking, and funny, but it also managed to stir up my investing mind.

Two of Hometown Cha Cha Cha’s key characters are the kind-hearted and carefree male protagonist Hong Du-Sik, and the meticulously forward-planning and caring female protagonist Yoon Hye-Jin. Throughout the series, which was set in the beautiful but fictional sea-side town of Gongjin in Korea, it was heavily hinted that Du-Sik had a tragic past but the actual events were always a mystery until the penultimate episode.

Du-sik’s history

When Du-Sik was in university, he became roommates with a senior named Park Jeong-U and the two soon developed a strong brotherly bond. Being a senior, Jeong-U graduated from university first and became a fund manager at YK Asset Management. After Du-Sik completed his studies, Jeong-U roped him into the same firm. 

Du-Sik rapidly rose through the ranks at YK Asset Management. But despite his success, he always remained humble and kind towards everyone at the firm, even to the security guard at the office. Over time, the guard, Kim Gi-Hun, came to know Du-Sik better. Wanting to make money through stocks, Gi-Hun eventually asked to invest in the funds that Du-Sik was managing. Du-Sik, thinking that his funds were too risky for Gi-Hun, tried to dissuade him. Gi-Hun was persistent though, and Du-Sik eventually relented. But before Gi-Hun invested, Du-Sik strongly reminded him to never take unnecessary risks.

Soon after Gi-Hun invested in the funds, a seemingly major Korean company named Benjamin Holdings went bankrupt. The Korean stock market suffered a big one-day decline as a result, with the country’s major market indexes falling between 8% to 12%. Being worried, Gi-Hun sought advice from Du-Sik outside the office. 

During their conversation, Gi-Hun revealed that he had invested in one of Du-Sik’s riskiest funds, named ELF, despite Du-Sik having recommended less-risky choices. On the day of the big decline for Korean stocks, ELF was down by 70%. Du-Sik told Gi-Hun to hang onto the investment because the value of ELF should rise again with time. But – again unbeknownst to Du-Sik – Gi-Hun had poured gasoline into fire. The security guard invested in ELF with his security deposit for his house and so, had no holding power whatsoever. But that’s not all. Snared by greed, he even took up loans to invest in the fund. Upon these revelations, Du-Sik was called back to the office to deal with an emergency but told Gi-Hun that he would get back to him soon.

Back at the office, Du-Sik continued getting calls from Gi-Hun but he never picked them up as he was stressed and busy. A few days later, Du-Sik heard that Gi-Hun had attempted suicide and barely managed to survive. After hearing the news, Du-Sik immediately wanted to visit Gi-Hun at the hospital. But Du-Sik was in no condition to drive as he was suffering from a breakdown. Jeong-U volunteered to drive Du-Sik to the hospital and also share the responsibility for this tragedy. Unfortunately, they encountered an accident while on the road, which resulted in Jeong-U’s untimely death. 

Investing lessons

Gi-Hun’s experience with investing in ELF demonstrated two dangerous but entirely avoidable investing errors. 

First, he invested in something that was highly risky in nature. Hometown Cha Cha Cha did not explain what type of fund ELF was. But given the magnitude of its decline in relation to the broader market’s fall (-70% vs -8% or -12%) and its portrayal as being highly risky, I’m guessing it was an investment fund that utilised significant leverage. What amplified the damage was that Gi-Hun used borrowed money to invest  in ELF. The use of leverage can juice returns when the market is smooth-sailing. But when the waves get rough as they inevitably do, the downward movements are magnified substantially, to the point where you can drown. For example, if you’re investing $10 for every $1 you have (meaning you’re levered 10-to-1), even a 10% decline in your underlying holdings can wipe you out.

Second, he used his security deposit to invest in ELF. In my opinion, one of the most dangerous things an investor can do is to invest with money that he needs to use within a short span of time. If he does so, he may be forced to sell his stocks when prices are low, since the stock market is volatile and short-term price movements are incredibly hard to predict. Jeremy and I run an investment fund together that invests in stocks around the world. In our verbal and written communications to our investors, we highlight our hope that our investors will only invest with money that they would not need for the next five years or more. Even if it’s at the short-term expense of our business, we would not want to invest for someone if we learn that he needs the capital within this timeframe. The reason we do so is because we want ideally all of our investors to have holding power. We do not want our investors to suffer the unnecessary risk of having to be a forced seller at a time when prices are low.

An affinity

While learning about Du-Sik’s tragic past in the penultimate episode of Hometown Cha Cha Cha, I felt an affinity with the character. During the episode, Du-Sik said: 

“He [referring to Jeong-U] convinced me to work at that company [referring to YK Asset Management]. He was a fund manager there. At first, I was hesitant about taking the job. It had nothing to do with my major and was too money-oriented. I didn’t like that. But then he said, “Fund managers give ordinary people hope that even they can become rich.” I think… that made me change my mind.”

I graduated from university with an engineering degree, just like Du-Sik in the show. But unlike the character, I knew, even as a university student, that I wanted to be in the investment world. Where we’re again similar, is that I did not want to just be a cog in the machine and make money – I wanted to be in a role in the investment industry where I could positively impact the lives of many. This is why I was so thrilled when the opportunity to join The Motley Fool’s Singapore office landed on my lap in late-2012. I officially started in January 2013. Back then, the Fool already had a wonderful purpose to “Help The World Invest, Better.” A few years into my stint with the company, the purpose was upgraded: The Fool now wants to “Make The World Smarter, Happier, and Richer.” Both purpose statements are wonderful and resonate with me. 

When I had to leave the Fool’s Singapore office in late-2019, I embarked on a new adventure with Jeremy to set up an investment fund. Our fund’s mission is to “Grow Your Wealth, and Enrich Society.” I was thrilled to once again have the good fortune to be in a role in the investment industry where I could positively impact the lives of many. And although our fund can only serve accredited investors at the moment, we are working towards opening up the fund to all investors in Singapore in the future, if Lady Luck graces us with her presence and we gain the necessary scale to do so.

I never expected to feel an affinity with a romantic comedy such as Hometown Cha Cha Cha. But the character of Hong Du-Sik – and his thought process in deciding to be a fund manager – brought a smile to my heart. I hope Hometown Cha Cha Cha can inspire other young people to develop aspirations to build better financial lives for others – especially the less privileged – if they choose to enter the investment industry. This will give meaning, purpose and blessings to their lives, way more so than the build pursuit of money. 


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. Of all the companies mentioned, I currently have a vested interest in Netflix. Holdings are subject to change at any time. 

Main Street Vs Wall Street

A conversation with Dollars and Sense on why stocks are performing well while many businesses and workers are struggling to survive and keep their jobs?

I was recently interviewed by Timothy Ho, co-founder of the personal and business finance online knowledge portal Dollars and SenseThe interview is part of Dollars and Sense’s #TheNewNormal interview series. With permissionI’ve reproduced my conversation with Timothy here. We covered a number of topics, such as the recent divergence seen in stock prices and economic growth, and whether I’m invested in other asset classes beyond stocks. You can  head here for the original interview.

Interview

Timothy Ho (Timothy): As a writer yourself, you wrote on your blog about how this current disconnect between Main Street and Wall Street isn’t the first time that stocks did fine when the economy fell apart. What makes this recession experienced by many countries different from past recessions such as the GFC and the Asian Financial Crisis?

Ser Jing: You mentioned the GFC, and I have looked at how stocks recovered during the crisis. Interestingly, it follows a similar pattern to what I wrote about in the blog post that you referenced. Although the S&P 500 reached a low in early-March 2009 during the GFC, many individual stocks bottomed months before that, in November 2008. And it turned out that the US’s GDP and unemployment rate continued to deteriorate for months after these individual stocks reached their crisis-lows. I wrote about this in a blog post linked here. So, I think a takeaway here is that stocks tend to – though not always – look ahead into the future. While things may look bleak today, stocks may already be racing ahead in anticipation of a better tomorrow.

This COVID-19-driven recession has caused pain to many economies around the world. In response, central banks in these economies have at times intervened in unprecedented ways. Some market participants may point to these interventions as the reason why stocks have risen so much from their pandemic lows. But I want to point out something interesting. In my blog post that you referenced, I wrote about how US stocks did during the Panic of 1907. This was a period of immense economic pain for the USA and was one of the key reasons why the US government decided to set up the Federal Reserve (the US’s central bank) in 1913. During the Panic of 1907, the US economy was still in shambles even in 1908, but the US stock market had bottomed in November 1907 and then started climbing rapidly in December 1907 and throughout 1908. And here’s the interesting thing: The US central bank was not even established back then.  So perhaps there’s more to the recovery in stocks from the pandemic lows that we’re seeing today than just the actions of the central banks.

You also asked what makes the COVID-19-driven recession different from past recessions such as the GFC and Asian Financial Crisis. One key difference is that most past recessions were the result of excesses in the economy (both the GFC and Asian Financial Crisis were caused by excessive borrowing – on the part of households and financial institutions in the case of the GFC, and on the part of countries in the case of the Asian Financial Crisis). The COVID-19-driven recession, on the other hand, was caused by disruption to our daily work and ceasing of many economic activities to halt the virus’s spread. It was not caused by excesses in the system. This is a point that Howard Marks, an investor I deeply respect, has made. So, I think a lot of the playbooks that investors have developed based on the lessons from past recessions may not be very applicable in today’s context.

Timothy: It will be easy for us to simply say that investors are starting to realise the importance of investing (or investing more) even during a recession. But is there an element of FOMO (fear of missing out) that is creeping into many retail investors? For example, we see meme stocks, NFTs and cryptocurrencies being incredibly volatile, not to mention, speculation of many pump-and-dump tactics at work. Are these factors contributing to this surprising bull run?

Ser Jing: It’s hard to tell what are the psychological factors that contribute to the current bull run in stocks. I don’t have a good answer. But I do think it’s clear that there are speculative actions being seen, as you rightly mentioned, in some corners of the financial markets. If these speculative actions lead to excessive, widespread optimism about stocks soon, then another crash may be around the corner.

Timothy: While it’s good to see people getting interested in investing and trading in the financial markets, I realised that many new investors I met these days are more open to investing or trading, even when they recognise that they don’t have the knowledge they need. It’s like the desire to get started on their investment journey outweighs the need to learn first. In your opinion, is this good or bad?

Ser Jing: Great question! My answer is “it depends.” If the new investor is young, with decades ahead to make full use of his/her human capital, then getting started on an investment or trading journey even without the requisite knowledge is not a bad thing. The best teacher for such lessons is the mistakes we make ourselves. By starting early, the new investor gets to make the important mistakes, when her capital for investing is small and when she has plenty of time to recover from her mistakes by making more money in the future from entrepreneurship or employment. On the other hand, if the new investor is approaching retirement, then starting to invest or trade without the requisite knowledge is a bad idea.  

Timothy: What are some things about the stock market that have surprised you over the past 18 months?

Ser Jing: I am generally not surprised by what happens in the financial markets, not because I can predict the future (I absolutely cannot – I have no crystal ball), but because I am aware that surprising things happen all the time in the financial markets. But I am still in awe at the magnitude of the rebound in stock prices from the pandemic lows.  

Timothy: With decentralised finance (DeFi) taking center stage (pun intended), do you personally expect to see a financial world in the future where prime assets to hold go beyond just stocks and properties, and include other asset classes like NFTs and cryptocurrencies?

Ser Jing: I am still very much a novice when it comes to NFTs, cryptos, and blockchain technology. I am still learning, and it’s a fascinating area. I don’t know what the chances are that NFTs and cryptos will become prime assets in the future. But I’ve seen some forward-looking venture capitalists compare the state of NFTs, cryptos, and blockchain tech today to what the internet was like 20 years ago. Back then, the internet seemed mostly like an object of curiosity but look at what it is today. For now, I am watching developments in the blockchain space as a highly curious and interested novice.

Timothy: Beyond just individual companies, do you look at other traditional asset classes like indices and bonds in your investment portfolio?

Ser Jing: I don’t have my own personal investment portfolio. I set up Compounder Fund with Jeremy to invest in a way that we would for our own capital. The short answer to your question is that I don’t invest in other traditional asset classes for the fund.

Now for the long answer. First, when it comes to indices, I think it’s a great starting place for an investor who’s new to the financial markets. But for someone with expertise (and a very important part of the expertise involves having the right temperament), investing in individual stocks can generate much higher returns than investing in indices. There’s no guarantee that Jeremy and I have the expertise. But at the very least we have discipline – we’ve written about our investment process and methods in detail, and we intend to stick to what we’ve discussed. Second, when it comes to bonds, I don’t think I know bonds well enough to be able to form an investment opinion on them. I only want to invest in things that I understand well – and for now, it’s only stocks.


DisclaimerThe 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. Of all the companies mentioned, I currently have no vested interest in any of them. Holdings are subject to change at any time.

ASML: The Company Behind A Technological Marvel Powering The World’s Semiconductor Industry

As the only company that can build an EUV lithography machine, ASML has a critical role to play in an increasingly digital world.

On 24 June 2021, I recorded an episode for The Financial Coconut’s podcast series, TFC Stock Geekout. I appeared in the episode together with The Financial Coconut’s founder, Reggie Koh, and we talked about ASML (NASDAQ: ASML) for nearly an hour. We discussed many aspects about the company, including its revenue streams, growth prospects, risks, and more.

ASML is based in the Netherlands and is a company that’s in the portfolio of the investment fund that Jeremy and I run together. It’s a fascinating company to me because it is currently the only company in the world that can build an extreme ultraviolet (EUV) lithography machine. Lithography is the process of using light to create tiny, tiny structures (called transistors) on a silicon wafer to produce chips. EUV lithography is currently the most advanced lithography process and it uses ultraviolet light of an extremely short wavelength of 13.5 nm. In a world that is increasingly going digital, there is a need for a chip to contain more and more transistors because this improves a chip’s cost and performance. This is where EUV lithography machines shine. Because they use light with such a short wavelength, they allow chip manufacturers to produce chips with transistors that have mind bogglingly small sizes. (How small? Listen to the podcast to find out!)

The podcast episode that I recorded with Reggie was released recently and you can check it out below. I hope you’ll enjoy it!


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. Of all the companies mentioned, I currently have a vested interest in ASML. Holdings are subject to change at any time.

When The Stock Market Changes

How should investors approach changes in the stock market?

There are many important things about the stock market that can change, such as the behaviour of market participants and their level of collective knowledge. I believe an interesting example of this can be seen in the 2008/09 financial crisis.

The period was an economic calamity and stock prices fell sharply. During the crisis, the S&P 500, a broad index for US stocks, fell by nearly 57% from peak to trough. But then-Federal Reserve chair Ben Bernanke prevented an even worse disaster from happening.

Bernanke was a scholar on the Great Depression that happened in the 1930s. In a wonderful 2002 speech for the birthday gala of celebrated economist Milton Friedman, Bernanke laid out the mistakes the US government had made during the Great Depression. He ended the speech saying (emphasis is mine): 

I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

When the 2008/09 financial crisis erupted, Bernanke sought to prevent the same mistakes from happening. He largely succeeded and I think it’s telling that an 85% fall in stock prices – something that happened in the Great Depression – did not occur during the financial crisis.

I think that this trait about the market – that market participants can learn, collectively – has important implications for investors. Amazon’s founder Jeff Bezos once said (emphasis is mine): 

I very frequently get the question: “What’s going to change in the next 10 years?” And that is a very interesting question; it’s a very common one. I almost never get the question: “What’s not going to change in the next 10 years?” And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection.” 

I believe this applies to investing too. It’s better to build an investment strategy in the stock market around the things that are stable in time. What is one such thing? From my observations, I think one thing about the stock market that has been stable over the long arc of history is that it has remained a place to buy and sell pieces of a business. And I think this trait about the stock market will very likely continue to be stable over time.

With this in mind, what logically follows is that a stock’s price over the long run will continue to depend on the performance of its underlying business over the same period. In turn, a stock’s price will eventually do well if its underlying business does well too. All these mean that a lasting investment strategy is to identify businesses that are able to grow well over a long period of time.


 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. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

A New World of Accelerating Growth

Companies are growing faster today.

In 2016, Michael Mauboussin, a highly-regarded researcher and author in the investment industry, co-wrote a research paper published by Credit Suisse titled The Base Rate Book. Mauboussin and his co-authors studied the sales growth rates for the top 1,000 global companies by market capitalization since 1950. They found that it was rare for a company – even for ones with a low revenue base – to produce annualised revenue growth of 20% or more for 10 years.

For example, of all the companies that started with revenue of less than US$325 million (adjusted for inflation to 2015-dollars), only 18.1% had a 10-year annualised revenue growth rate of more than 20%. Of all the companies that started with inflation-adjusted revenue of between US$1.25 billion and US$2.0 billion, the self-same percentage was just 3.0%.

The table below shows the percentage of companies with different starting revenues that produced annualised revenue growth in excess of 20% for 10 years. You can see that no company in Mauboussin’s dataset that started with US$50 billion in inflation-adjusted revenue achieved this level of revenue-growth.

Source: Credit Suisse research paper, The Base Rate Book

But in a research piece published in June this year with Morgan Stanley titled The Impact of Intangibles on Base Rates, Mauboussin noted that Amazon had defied the odds. The US ecommerce juggernaut ended 2016 with US$136 billion in revenue and Mauboussin wrote (emphasis is mine):

“… work that we did in 2016 [referring to The Base Rate Book] revealing that no company with [US]$100 billion or more in base year sales had ever grown at that mid-teens rate for that long. Our data were from 1950-2015 and reflected sales figures unadjusted for acquisitions and divestitures but adjusted for inflation. The analysis was not specific to any particular business, but the clear implication was that it was improbable that a company that big could grow that fast.

Amazon will be at a [US]$515 billion-plus sales run rate by the second quarter of 2022 and will have a 6-year sales growth rate ended 2022 of 27.6 percent, if the consensus estimates are accurate… If achieved, Amazon’s results will recast the base rate data.”

In The Impact of Intangibles on Base Rates, Mauboussin also shared the two main ways of making forecasts: The inside view and the outside view. Psychologist Daniel Kahneman, who won a Nobel Prize in Economics in 2002, has an interesting story in his 2011 book, Thinking, Fast and Slow, on these two ways of forecasting.

Kahneman shared in his book that years ago, he had to design a curriculum and write a textbook on judgement and decision making. His team consisted of experienced teachers, his own psychology students, and an expert in curriculum development named Seymour Fox. About a year into the project, Kahneman polled his team for estimates on how long they thought they would need to complete the textbook. Kahneman and his team assessed their own capabilities and concluded that they would need around two years – this was their inside view. After conducting the poll, Kahneman asked Fox how long other similar teams took to complete a curriculum-design from scratch. It turned out that around 40% of similar teams failed to complete their projects and of those who managed to cross the finish line, it took them at least seven years to do so. This was the base rate, the outside view. Kahneman and his team were shocked at the difference.

But in a validation of the outside view, Kahneman’s team eventually took eight years to finish their textbook. A key lesson Kahneman learnt from the episode was that incorporating the base rate would be a more sensible approach for forecasting compared to relying purely on the inside view. 

In an investing context, taking the inside view on a company’s growth prospects would be to study the company’s traits and make an informed guess based on our findings. Taking the outside view would mean studying the company’s current state and comparing it to how other companies have grown in the past when they were at a similar state. 

Jeremy and I manage an investment fund together. The fund invests in stocks around the world, and we have invested nearly all of the fund’s capital in companies that (a) have strong historical growth and thus high valuations, and (b) have what we think are high chances of producing strong future growth. For the fund to eventually produce a good return, its portfolio companies will need to grow their businesses significantly, in aggregate, in the years ahead.

Before we invested in the companies that are currently in the fund’s portfolio, we studied their businesses carefully. After our research, we developed the confidence that they would likely continue to grow rapidly for many years. We took the inside view. But we also considered the outside view. We knew that trees don’t grow to the sky, that it’s rare for companies to grow at high rates for a long time, and that some of our companies already had massive businesses. Nonetheless, we still invested in the companies we did for two reasons. First, we knew going in that we were looking for the outliers. Second, we had suspected for some time that the base rates for companies that sustain high growth for a long time have been raised from the past. 

Mauboussin’s research in The Impact of Intangibles on Base Rates lends strong empirical evidence for our suspicion. He found that companies that rely heavily on intangible-assets grow faster than what the base rate data show. This is an important observation. According to the 2017 book Capitalism Without Capital by Jonathan Haskel and Stian Westlake, investments in intangible assets around the world overtook investments in tangible assets around the time of the 2008/09 global financial crisis and the gap has widened since. As more and more intangibles-based companies appear, the number of companies with faster-growth should also increase.

But intangibles-based companies also exhibit a higher variance in their rates of growth, according to Mauboussin’s data in The Impact of Intangibles on Base Rates. Put another way, intangibles-based companies have a higher risk of becoming obsolete. The quality of an investor’s judgement on the growth prospects of intangibles-based companies thus becomes even more important.

Why did we suspect that companies today are more likely to be able to grow faster than in the past? A key reason is the birth of software and the internet. In our view, these two things combined meant that for the very first time in human history, the distribution of a product or service has effectively zero marginal costs, and can literally travel at the speed of light (or the speed at which data can be transmitted across the web). Paul Graham shared something similar in a recent blog post of his, How People Get Rich Now. Graham is a co-founder of the storied startup accelerator and venture capital firm Y Combinator. He wrote:

“[B]ecause newly founded companies grow faster than they used to. Technology hasn’t just made it cheaper to build and distribute things, but faster too.

This trend has been running for a long time. IBM, founded in 1896, took 45 years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7 or 8 years.”

If you’re an investor in stocks, like us, then I think it’s important for you to realise that we’re in a whole new world of accelerating growth.


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. I currently have a vested interest in the shares of Amazon.com. Holdings are subject to change at any time.

Playing The Right Game When Investing

“Investing” is not a one-size-fits-all thing. Everyone is playing a different game in the financial markets. Do you know the game you’re playing?

One of the best books I’ve read over the past year is William Green’s Richer, Wiser, Happier. In his book, Green writes about the lessons he’s gained from his interactions with some of the world’s best investors over the past few decades. One of the investors Green profiled in his book was Nicholas Sleep, whom I admire deeply. Here’s a memorable passage from the book on Sleep’s experience while investing in Amazon:

“Skepticism about Amazon continued to swirl. In the midst of the 2008 market meltdown, Sleep attended an event in New York where George Soros spoke about the threat of an impending financial apocalypse. Soros, one of the most successful traders in history, named just one stock that he was shorting as the world fell apart: Amazon.”

Amazon’s share price ended 2007 at US$92 and eventually fell to a low of US$35 during the 2008/09 financial crisis in November 2008. So Soros likely earned a handsome profit with his short of Amazon. But what’s also interesting is that Amazon’s current share price of around US$3,500 is tens of times (even more than a hundred times) higher than where it was at any point in 2008. The chart below shows Amazon’s share price from the end of 2007 to 30 June 2021.

Source: Yahoo Finance

The passage about Soros from Green’s book, and Amazon’s subsequent share price movement since the end of 2007, reminded me of an article from venture capitalist and finance writer, Morgan Housel. In his piece, Play Your Game, Housel wrote:

“It’s so easy to lump everyone into a category called “investors” and view them as playing on the same field called “markets.”

But people play wildly different games.

If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a powerlifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing…

2. Figure out what game you’re playing, then play it (and only it).

So few investors do this. Maybe they have a vague idea of their game, but they haven’t clearly defined it. And when they don’t know what game they’re playing, they’re at risk of taking their cues and advice from people playing different games, which can lead to risks they didn’t intend and outcomes they didn’t imagine.”

An investor who shorted Amazon early in 2008 and covered his short position later in the year, and another investor who invested in the company early in the same year but for the long run, both made the right decisions. They were merely playing different games

At the investment fund that I’m running with Jeremy, we clearly know the game we’re playing. We’re looking for great businesses, buying their shares, and holding them for the long run while knowing that the share prices can be volatile. Other market participants can say that Amazon’s share price may fall by 30% over the next year – and they may well be right. But it’s of no consequence to Jeremy and me. Guessing what share prices will do over the short run is not the game we’re playing, and it’s not a game we know how to play. What’s important to us – and what we think we understand – is where Amazon’s business will be over the long run. 

When investing, heed Housel’s words. “Figure out what game you’re playing, then play it (and only it).”


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. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

Investing Basics

A presentation on investing basics

I was invited by Autodesk’s Singapore office to give a presentation on investing on 30 June 2021. I would like to thank the Autodesk team for inviting me and for the event’s superb organisation. During my presentation, I talked about what stocks are; active versus passive investing; what asset allocation is; and useful resources for individuals to learn about investing. You can check out the slide deck for my presentation below!


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. I currently do not have a vested interest in any shares mentioned. Holdings are subject to change at any time.

How To Invest Through High Inflation

Buying the right businesses means you never have to worry about inflation.

Note: An earlier version of this article was first published in The Business Times on 30 June 2021

Is high inflation coming? If so, what stocks should investors be buying? Of late, these are hot topics in the investment industry. Earlier this month, strategists from the US-based investment research and brokerage firm, Bernstein Research, said that “there is probably no bigger macro issue, both tactically and strategically, than inflation and what this means for portfolios.”

Thankfully, Warren Buffett had laid out a blueprint in the 1980s for investors to deal with high inflation.

The right business characteristics

Chuin Ting Weber, CEO of Singapore-based bionic financial advisor, MoneyOwl, wrote in a recent article that “for the US, historically, the worst inflationary period in recent memory was from 1973-1981.” According to her article, the US inflation rate in that period ranged from 4.9% (in 1976) to 13.3% (in 1979). In 1981, the country’s inflation-reading was 8.9%.

It’s against this backdrop that Buffett, widely-regarded as the best investor the world has seen, discussed how investors can cope with inflation in his 1981 Berkshire Hathaway shareholder letter. He wrote that “businesses that are particularly well adapted to an inflationary environment… must have two characteristics”. 

First, the business must have “an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume.” Second, the business must have “an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.”

In other words, a business that can cope well with high inflation must have (1) pricing power and (2) the ability to increase its sales volume by a large amount without the need for significant additional capital investments.

How inflation hurts

But just why is the reverse type of business – one that has no pricing power and that requires significant investment capital to increase sales volumes – bad in an inflationary environment?

The pernicious effect of a lack of pricing power is straightforward. In an inflationary environment, costs for a business will rise. Without the ability to increase its selling prices, a business’s profit will suffer.

Why would businesses that need significant additional investment of capital to increase their sales volumes suffer during inflationary periods? The reason is more complex. Buffett explained in his 1983 Berkshire Hathaway shareholder letter.

He used two businesses to illustrate his point. One is See’s Candies, a subsidiary of Berkshire’s that makes and sells confectionaries. The other is a hypothetical company. For our discussion here, let’s call it Bad Business.

When Berkshire acquired See’s Candies in 1972, it was earning around US$2 million in profit on US$8 million of net tangible assets. On the other hand, Buffett gave Bad Business the hypothetical numbers of US$2 million in profit and US$18 million in net tangible assets. 

Buffett further illustrated what would happen to the two businesses if inflation ran at 100%. Both See’s Candies and Bad Business would need to double their earnings to US$4 million just to keep pace with inflation. To do so, the two businesses can simply sell the same number of products at two times their previous prices, assuming that their profit margins remain constant.

But there’s a problem. Both businesses would likely also have to double their investments in net tangible assets, “since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad.” For example, doubling dollar-sales would mean “correspondingly more dollars must be employed immediately in receivables and inventories.”

This is where See’s Candies starts to shine. Because See’s Candies requires US$8 million in net tangible assets to produce US$2 million in profit, it will only need to ante up a further US$8 million “to finance the capital needs imposed by inflation.” Bad Business, on the other hand, would require a much larger sum of US$18 million in additional capital to produce the output required (the extra US$2 million in profit) simply to keep up with inflation. 

Buffett summed up the discussion by saying that “any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation.” The businesses that are “hurt the least” are the ones that require little tangible assets.

The right businesses

In my opinion, technology businesses that offer digital products or services have one of Buffett’s required characteristics for a business to cope well with inflation. Examples of such technology businesses, under my definition, include DocuSign (the provider of an e-signature software solution), Etsy (the owner of its namesake e-commerce marketplace that connects buyers and creators of artisanal, unique products), and Facebook (the company behind its eponymous social media platform). 

When such a technology business sells its products or services, its marginal costs are minimal – there’s no major difference in costs for the business to provide a piece of software to either one customer or 10. Such products or services also involve minimal inventory, so increasing selling prices in an inflationary environment will not involve the need for employing correspondingly more dollars in inventories. In other words, this technology business can accommodate a large increase in sales volume without the need to increase its working capital. 

Contrast this dynamic with a business that manufactures widgets or physical products. The production of each new widget or product requires additional capital for raw materials and/or new manufacturing equipment. Widgets and physical products also involve inventory, so increasing selling prices in an inflationary environment will require correspondingly more dollars in inventories, thus tying up valuable working capital.

This is not to say that all technology businesses that offer digital products or services can cope well with inflation. It’s also important to consider their pricing power. We can gain some insight on this by understanding how important a technology business’s digital product or service is to its users. The more important the product or service is, the higher the chance that the business in question possesses pricing power.

A better approach

In the early 1970s, Buffett correctly foresaw that high inflation in the USA would rear its ugly head later in the decade. But it’s worth noting that he then got his subsequent views on inflation wrong. 

For example, in his 1981 Berkshire Hathaway shareholder letter, Buffett wrote that his “views regarding long-term inflationary trends are as negative as ever” and that “a stable price level seems capable of maintenance, but not of restoration.” In another instance, this time in his 1984 Berkshire Hathaway shareholder letter, Buffett shared his belief that “substantial inflation lies ahead.”

What happened instead was that inflation in the USA declined substantially after the 1970s. According to data from the World Bank, the country’s inflation rate averaged at 7.1% in the 1970s, 5.6% in the 1980s, 3.0% in the 1990s, 2.6% in the 2000s, and 1.8% in the 2010s. 

This is not a dig at Buffett. He’s one of my investment heroes. This is simply to show how hard it is to be correct about macroeconomic developments.

So instead of wondering whether high inflation is coming, the better approach for stock market investors – in my opinion – is to not care about inflation. Instead, investors can simply focus on finding businesses that have a high chance of doing well over the long run regardless of the level of inflation.

On this point, I come back again to technology businesses that are selling digital products and services that are highly important to their users. It’s easy to do a lot worse than investing in businesses that have pricing power and that can produce large increases in sales volumes without the need for significant additional investment of capital.


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. I currently have a vested interest in DocuSign, Etsy, and Facebook. Holdings are subject to change at any time.