Category: General Investing

What is the right amount of stocks an investor should have in his/her portfolio to achieve diversification? Is it 10? Is it 20? Is it 100?

I currently believe that the right level of diversification is different for each investor. Some investors have an investment process and psyche that suits a highly concentrated portfolio, say, of 10 companies or less. I know I do not belong in this group. I am well-suited for a portfolio that has significantly more companies.

When I was investing for my family, the portfolio had slightly more than 50 companies by the time I liquidated most of its stocks in June 2020 so that the capital could be invested in an investment fund I’m currently running with Jeremy. I was comfortable managing around 50 companies and I could sleep soundly at night. 

Why do I say that the right level of diversification is different for each investor? Let’s consider the case of three legendary US-based investors. 

First there’s Peter Lynch, the manager of the Fidelity Magellan Fund from 1977 to 1990. During his tenure, he produced a jaw-dropping annual return of 29%, nearly double what the S&P 500 did. Toward the end of Lynch’s stint, the Magellan Fund owned more than 1,400 stocks in its portfolio.

Then there’s Walter Schloss, who produced an astonishing return of 15.3% per year from 1956 to 2000; in comparison, the S&P 500’s annualised gain was a little below 11.5%. Schloss typically held around 100 stocks in his portfolio at any given time.

The third investor is Charlie Munger, who achieved an annual return of 13.7% per year when he was managing an investment fund from 1962 to 1975. Over the same period, the Dow was up by just 5.0% per year. At any point in time, Munger’s portfolio would only have a handful of stocks.

Lynch, Schloss, and Munger are all stock market investors with incredible long-term track records (and I consider all of them as my investment heroes!). But their levels of diversification are so different. I think this is the best example of how there’s no magic number when it comes to diversification. You have to first understand your own temperament before you can know what’s the right level of diversification, for you.

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

*Quotes may be lightly edited for reading purposes

ASML: Semiconductor Industry experiencing strong growth

Question: To close off, do you expect strong demand to continue beyond 2022? 

ASML CEO Peter Wennick: Absolutely. I said it before, we are looking at the secular growth trend and we talked about this extensively during our Capital Markets day at the end of last year. The growth profile of this industry is impressive. The semiconductor industry is planned to double in size to a trillion dollars by the end of this decade. And of course, this will also have an effect on our business. So what do we do? And I have to admit, we as an industry, us and our customers and their customers, we have underestimated the long-term growth profile of the company. So we need to catch up. How do we do that? We build capacity. And that is what we are very much focusing on. Building capacity at ASML, but also in the supply chain. To make sure that we can significantly increase our output both for DUV and for EUV and for our metrology and measurement systems – basically across our entire product line. So, bearing that in mind, I’m even more optimistic about the long-term growth profile of this company. 

WISE plc: Cross border transaction volume growing and prices decreasing

WISE Trading update: Revenue grew by 34% YoY and 13% QoQ to £149.8 million, broadly in line with the rate of growth in volume. Our continuing efforts to engineer and optimise away costs to support sustainably lower prices for customers resulted in a lower take rate as expected, reducing to 0.73%, down 2bps YoY and 1bp QoQ. This reflects the price drops which are partially offset by incremental revenue from other sources beyond cross-border transactions.

Looking ahead, we continue to expect the take rate to be slightly lower in the second half of FY2022 (WISE’s financial year-end is 30 June) compared to the first half as a result of price reductions. This is expected to be more than offset by higher volumes as we now anticipate revenue growth of c. 30% for FY2022 over FY2021. We continue to expect gross margin for FY2022 to be c.65-67%, subject to foreign exchange related costs continuing to remain broadly stable.

Intuitive Surgical: Number of robot-assisted surgery grows in 2021

Gary Guthhart (CEO): Putting 2021 in context, demand for our robotically assisted interventions has been resilient during COVID. While these interventions get delayed during COVID peaks, the return when COVID wanes, and that is encouraging. Pandemic stresses on healthcare systems emphasize the need for the kind of high-quality, minimally invasive interventions or products enable. MIS (minimally invasive surgical) procedures allow greater use of ambulatory surgery, free up resources and ORs relative to other approaches, and often enable faster patient return to home and overall recovery.

In 2021, da Vinci procedures grew 28% compared to full-year 2020, reflecting a partial recovery in surgery after the first wave of the pandemic. Over the two-year period, 2020 and 2021, the compound annual growth rate in procedures was 14%. 

Netflix: Low member add guidance for Q1 2022 due to combination of factors but business still structurally unchanged

Spencer Neumann (CFO): No structural change in the business that we see. We guided to 2.5 million paid net adds in Q1. And what’s reflected there is pretty much the same trends we saw in Q4: so healthy retention with churn down, healthy viewing and engagement with viewing up and acquisition growing but a bit slower than pre-COVID levels, just hasn’t fully recovered.

And we’re trying to pinpoint why that is. It’s tough to say exactly why our acquisition hasn’t recovered to pre-COVID levels. It’s probably a bit of just overall COVID overhang that’s still happening after two years of a global pandemic that we’re still unfortunately not fully out of, some macroeconomic strain in some parts of the world like Latin America in particular. While we can’t pinpoint or point a straight line using — when we look at the data on a competitive impact, there may be on the marginal side of our growth, some impact from competition but which, again, we just don’t see it specifically.

So overall, that’s what’s reflected in the guide. I’d say our big titles are also landing, at least our known big titles, a little bit later in the quarter with Season 2 of “Bridgerton” in March, “The Adam Project” also in March. As you know, we are also changing prices in some countries in Q1 of this year and it happens to be our largest country, as we announced last week, actually our largest region with Canada as well. So that’s probably a little bit more impact than a typical quarter.

Microsoft: Broad-based growth and optimism from management

Amy Hood (CFO): And finally, for FY22, given our strong performance in the first half of the fiscal year and our current H2 outlook, full-year operating margins should be slightly up year-over-year even with the impact of changes in accounting estimates noted earlier and the significant strategic investments we are making to capture the tremendous opportunities ahead of us.

In closing, digital technologies are increasingly essential to empowering every person and organization on the planet to achieve more and we are well-positioned with innovative, high-value products. Our diverse, yet connected portfolio of solutions span end markets, customer sizes, and business models uniquely enabling us to deliver long-term revenue and profit growth. 

Tesla: Steady growth and FSD software will become financially important

Elon Musk (CEO): In 2022, supply chain will continue to be the fundamental limiter of output across all factories. So the chip shortage, while better than last year, is still an issue. There are multiple supply chain challenges. And last year was difficult to predict, and hopefully, this year will be smooth sailing, but I’m not sure what you do for an encore to 2021, 2020.

Nonetheless, we do expect significant growth in 2022 over 2021, comfortably above 50% growth in 2022. Full self-driving. So, over time, we think full self-driving will become the most important source of profitability for Tesla. Actually, if you run the numbers on robotaxis, it’s kind of nutty — it’s nutty good from a financial standpoint.

And I think we are completely confident at this point that it will be achieved. And my personal guess is that we’ll achieve full self-driving this year with a data safety level significantly greater than the present. So it’s the cars in the fleet essentially becoming self-driving by a software update, I think, might end up being the biggest increase in asset value of any asset class in history. 

Mastercard: Cross border transactions growing, Omicron only expected to have temporary impact

Michael Miebach (CEO): Looking at Mastercard’s spending trends, switch volume growth continued to improve quarter over quarter. Both consumer credit and debit continued to grow well. 

Turning to cross-border. The recovery has continued with overall Quarter 4 cross-border levels now higher than those in 2019. Cross-border travel continued to show improvement relative to Quarter 3 levels, aided by border openings in the U.S., U.K. and Canada. 

While Omicron has had some recent impact on cross-border travel, we continue to believe that cross-border travel will return to 2019 levels by the end of this year. Cross-border card-not-present spending ex travel continued to hold up well in the quarter. So overall, the spending trends are moving in the right direction with some near-term travel-related headwinds as a result of the variant.

Visa: Long growth runway ahead

Vasant Prabhu (Vice-Chair and CFO): FY ’22 is off to an excellent start. We expect our growth this year will be well above the pre-COVID rate as cross-border recovers. This will likely continue into fiscal year ’23. 

Beyond that, we are confident the business can sustain a revenue growth rate above pre-COVID levels for three reasons: first, an acceleration away from cash and check for merchant payments, both domestic and cross-border, as digitization becomes pervasive across consumers and businesses globally; second, acceleration of cash, check and wire transfer displacement as our new flows initiatives penetrate a broad range of new use cases with very large total addressable markets; third, sustainable high-teens growth across our value-added services, both from existing services and new offerings. As new flows and value-added services become a larger part of our revenue mix, growing faster than consumer payments, the sustainable growth rate will continue to rise. We are and will continue to invest in the capabilities required to capture the extraordinary growth opportunity ahead of us.

Apple: Strong quarter with broad-based growth

Tim Cook (CEO): Today, we are proud to announce Apple’s biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices.

We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply-constrained.

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 Apple, Mastercard, Visa, ASML, Microsoft, Netflix, Wise, Intuitive Surgical, and Tesla. Holdings are subject to change at any time.

During bouts of short-term underperformance and/or significant volatility in stock prices, it’s easy to throw in the towel and get out of them to relieve the psychological stresses that result. I believe that this is the worst thing an investor can do because doing so will cause temporary underperformance and/or losses to become permanent ones. It is difficult to stay the course – I get that. But it is crucial to do so because even the best long-term winners in the stock market can make our stomachs churn in the short run.

Don’t believe me? I’ll show you through a game. All you have to do is to answer two questions that involve two groups of real-life companies. Please note your answers for easy reference when you see the questions (it’ll be fun, trust me!).

Figure 1 below is a chart showing the declines from a recent-high for the S&P 500 and the stock prices of the first group of companies (Company A, Company B, and Company C) from the start of 2010 to the end of 2021. The chart looks brutally rough for the three companies. All of them have seen stock price declines of 20% or more on multiple occasions in that time frame. Moreover, their stock prices were much more volatile than the S&P 500 – the index experienced a decline of 20% or more from a recent high just once (in early 2020). So the first question is, after seeing Figure 1, would you want to own shares of the first group of companies if you could go back in time to the start of 2010?

Table 1 below illustrates the stock price and revenue growth for the second group of companies (Company D, Company E, and Company F) from the start of 2010 to the end of 2021, along with the S&P 500’s gain. The second trio of companies have generated tremendous wealth for their investors, far in excess of the S&P 500’s return, because of years of rapid business growth. The second question: If you could travel to the start of 2010, would you want to own shares of the companies in the second group?

My guess for the majority of responses for the first and second questions would be “No” and “Yes”, respectively. But what’s interesting here is that both groups refer to the same companies! Company A and Company D are Amazon; B and E refer to MercadoLibre, and C and F are Netflix. There’s more to the returns of the three companies from 2010 to 2021. Table 2 below shows that the trio have each: (a) underperformed the S&P 500 in a few calendar years, sometimes significantly; and (b) seen their stock prices and business move in completely opposite directions in some years.

There are two other interesting things about the stock price movements of Amazon, MercadoLibre, and Netflix. 

First, in every single time-frame between the start of 2010 and the end of 2021 that has a five-year or longer holding period (with each time-frame having 31 December 2021 as the end point), there is not a single time-frame where the annualised return for each of the three companies is negative or lower than the S&P 500’s. For perspective, the minimum and maximum annualised returns for the trio and the S&P 500 are given in Table 3. If you had invested in the three companies at any time between 1 January 2010 and 31 December 2016, and held onto them through to 31 December 2021, you would have not only significantly beaten the S&P 500 for any start-date, you would also have earned high annual returns.

Second, the returns for Amazon, MercadoLibre, and Netflix for all the same start-dates as in the data shown in Table 3, but this time for shorter holding periods of 1 year and 2 years, have been all over the place. This is displayed in Table 4. Notice the common occurrence of negative as well as market-losing returns for the three companies for both 1-year and 2-year holding periods.

After sweeping up all the data shown in Figure 1 and Tables 1, 2, 3, and 4, the critical highlights are these:

• By looking at just the long-term returns that Amazon, MercadoLibre, and Netflix have produced, it’s difficult to imagine that their stock prices had to traverse brutally rough terrains to reach their incredible summits. But this is the reality that comes with even the best long-term winners. It’s common for them to have negative and/or market-losing returns over the short-term even as they’re on the path toward fabulous long-term gains. For example, an investor who invested in Amazon on 9 December 2013 would be sitting on a loss of 20.4% one year later while the S&P 500 was up by 16.3%. But someone who invested in Amazon on 9 December 2013, and held on till 31 December 2021, would have earned an annualised gain of 30.7%, way ahead of the S&P 500’s annual return of 15.0% over the same period. In another instance, MercadoLibre’s stock price fell by 20.6% one year after 29 September 2014, even though the S&P 500 inched down by just 2.7%; on 31 December 2021, the compounded returns from 29 September 2014 for MercadoLibre and the S&P 500 were 41.4% and 15.1%, respectively. Meanwhile, an investor buying Netflix’s shares on 3 August 2011 would be facing a massive loss of 79.3% one year later, even as the S&P 500 had gained 10.7%. But Netflix’s annualised return from 3 August 2011 to 31 December 2021 was an impressive 30.7%, nearly twice the 15.9% annual gain seen in the S&P 500. 
• A company’s stock price can exhibit stomach-churning short-term volatility even when its underlying business is performing well. For example, Amazon’s robust 19.5% revenue growth in 2014 came with a 22.2% stock price decline, MercadoLibre’s stock price was down by 10.4% in 2015 despite revenue growth of 17.1%, and Netflix’s 48.2% revenue growth in 2011 was accompanied by a 60.6% collapse in its stock price. Significant short-term deviations between a company’s business performance and stock price is simply a feature of the stock market, and not a bug. 
• Having to suffer through an arduous journey is the price we have to pay (the fee for admission!) to reach the top of the mountain, but it’s a journey that is worth being on. 

Accepting that volatility is a feature of stocks can lead to a healthy change in our mindset toward investing. Instead of seeing short-term volatility as a fine, we can start seeing it as a fee – the price of admission, if you will – for great long-term returns. This is an idea that venture capitalist Morgan Housel (who also happens to be one of my favourite finance writers) once described in a fantastic article of his titled Fees vs. Fines.

Seeing volatility as a fee can also help all of us develop a crucial character trait when dealing with the inevitable ups and downs in the financial markets: Equanimity. Being able to remain calm when stock prices are roiling is important because it prevents us from making emotionally-driven mistakes. Another thing that can help strengthen the equanimity-fibre in our psyche is to focus on business results. Stock prices and business growth converge in the long run. But over the short run, anything can happen. 

It’s never fun to deal with falling stock prices. But as Josh Brown, CEO of Ritholtz Wealth Management and one of my favourite market commentators, wrote in a recent blog post: “Returns only come to those who are willing to bear that volatility when others won’t. The volatility is the point.”

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 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 Amazon, MercadoLibre, and Netflix. Holdings are subject to change at any time.

Interest rates are rising around the world. The Bank of England increased interest rates in December 2021 from 0.1% to 0.25% while countries such as Japan, New Zealand, and Brazil have all raised their respective interest rates too. 

The Federal Reserve, the central bank of the United States, also seems wary of inflation and is likely contemplating raising rates this year. 

How do these actions of central banks around the world impact stocks?

Interest rates can theoretically impact stock prices in a few ways. First, it can impact the profits of a business. Companies with debt will experience an increase in borrowing costs which leads to lower profits and cash flows, all else equal.

Higher interest rates can also theoretically affect stock valuations as fixed-income yields become more attractive. This means stocks require a higher rate of return – and thus a lower valuation – to compete with the now higher-yielding instruments.

Higher rates impact high growth companies disproportionately

Higher interest rates, in theory, also impact high growth companies more than low-growth companies.

This occurs because most of the current value of high growth companies is derived from cash flows generated much later in the future. Take Tesla for example.

Tesla is a high growth company whose cash flows it will generate many years in the future make up the bulk of the company’s value. 

Using the last full-year results (FY2020), I modelled* the company with the following parameters: Revenue growth of 50% for 10 years; achieve an 18% free cash flow margin in the 10th year; share dilution of 5% a year; and a terminal growth rate of 6%.

If I need a 12% required rate of return, the net present value (discounted value of all future cash flows) per share works out to US$1,362. But if I need a 15% rate of return, the net present value per share drops to just $739. Just a 3% increase in the required rate of return reduces the company’s net present value per share by 46%.

On the other hand, let’s assume a company that starts off at a similar size as Tesla now but has much lower growth rates of just 10% and a terminal growth rate of 2%.

Using a 12% required rate of return, the net present value per share is $49. If I increase the required rate of return to 15%, the net present value per share drops 24% to $37. The key difference between Tesla and the slow growth company is that the slow growth company’s share price drops much less when the required rate of return rises.

High growth stocks have been hammered

As you can see, the higher required rate of return impacts high growth stocks disproportionately. This is possibly one of the reasons why we are seeing high growth companies whose values are largely derived from future cash flow fall more sharply than companies that have slower growth rates.

Personally, I have a large chunk of my wealth invested in high growth companies whose share prices have taken a drubbing. While it is not pleasant to see, there are two reasons why I am still optimistic.

First, based on my projected future cash flows for these companies and factoring in the fall in share prices, many of the companies I have a vested interest in look likely to provide very high rates of returns even if interest rates do keep on rising.

Second, interest rates tend to impact valuations only temporarily.

The Fed and the world’s other central banks make rate hikes and cuts based on the economic conditions at that time. Most of the time, interest rate hikes or cuts along with other monetary and fiscal measures are effective enough that the central banks will have to reverse the rate change after several years and on and on the cycle goes. As such, I believe that rate hikes and rate cuts are merely short term noise that should not impact the way we invest.

What to do now?

Personally, instead of fretting over rising rates, I focus my efforts on finding excellent companies that I believe have durable long-term growth potential.

Besides looking for growth, I also know that interest rates can impact the cost of borrowing for companies. As such, I tend to prefer to invest in companies that have relatively low debt or debt that they can easily service even if rates go up. 

By focusing on these characteristics of a business, I believe my portfolio will still be well-positioned in any interest rate environment.

*You can find the calculation in this Google Sheet

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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 Tesla. Holdings are subject to change at any time.

Are the best investors dead? 

That’s what a Fidelity internal performance review seems to suggest. Fidelity supposedly reviewed the performance of its customers from 2003 to 2013 and found that the best returns were from its customers who were either dead or inactive. These are customers who either died and had their assets frozen, or forgot about their assets.

Although I have not been able to find the original research paper by Fidelity, multiple sources have referred to it (see here, here, and here).

Whether the research was legitimate or not, the notion that inactive investors outperformed their peers does seem possible.

The market rewards inactivity

The stock market is volatile. The past two years has clearly demonstrated that. Volatility tempts investors to trade frequently in the hope of timing their buys and sells to coincide with peaks and troughs. However, in reality, buying at the lows and selling at near-term peaks is easier said than done.

Investors who trade frequently end up paying more trading fees and may miss out on the best days in the market. The latter is particularly harmful, as missing out on only a handful of the best days in the market has historically resulted in significantly lower returns.

Inactive investors, on the other hand, ride out the short-term volatility of the market whilst staying invested. With the stock market indexes historically going up over the long-term, investors who have simply sat tight and held on to their investments have done extremely well.

Choose wisely and diversify

But not all investments go up over time. A study by JP Morgan found that two-thirds of all stocks underperformed the Russell 3000 index from 1980 to 2014. Moreover, 40% of all stocks had a negative absolute return over the 30-year time frame. 

In fact, the bulk of the market’s returns was driven by just a small group of stocks.

What this means is that investors can’t simply buy and hold any stock. We must choose wisely or we’d risk underperforming or even losing money over the long term. 

To reduce our risk of losses and increase our chances of holding just one of these high performing investments, we should diversify our portfolio.

This reduces the risk of omission which can be much more costly than the risk of commission.

Learning from the dead

Once we have identified a diversified investment portfolio, we can start to copy the “dead”. By simply ignoring near term price volatility, doing nothing and letting our investments compound over time, investors are likely to outperform their more active peers. 

This strategy is, in fact, practised by one of the best-performing investment funds in the world, the Fundsmith Equity Fund. The fund, which is run by Terry Smith, has produced an annualised return of 18.4% since its inception in November 2010. This is far ahead of the MSCI World index which has returned 12.8% in the same time. 

Fundsmith follows a simple three-step investment strategy: “1. Buy good companies; 2. Don’t overpay; 3. Do nothing”

But don’t be fooled by the simplicity of Fundsmith’s approach. Buying good companies is one of the pillars of its success. But the third step – – do nothing – has been an important reason behind why Fundsmith’s investments have been allowed to compound.

If Fidelity’s research and Fundsmith’s track record are anything to go by, investors could increase their odds of outperforming more active market participants if they are able to replicate this patient approach.

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

One of my favourite investing stories involves one of Warren Buffett’s best – maybe even his best – investment returns. This return came from his 1973 purchase of The Washington Post Company (WPC) shares. Today, WPC is known as Graham Holdings Company. Back then, it was the publisher of the influential US-based newspaper, The Washington Post. 

Buffett did not invest much in WPC, but the percentage-gain is stunning. Through Berkshire Hathaway, he invested US$11 million in WPC in 1973. By the end of 2007, Berkshire’s stake in WPC had swelled to nearly US$1.4 billion, which is a gain of over 10,000%

But the percentage gain is not the most interesting part of the story. What’s interesting is that, first, WPC’s share price fell by more than 20% shortly after Buffett invested, and then stayed in the red for three years. Second, WPC was a great bargain in plain sight when Buffett started buying shares. In Berkshire’s 1985 shareholders’ letter, Buffett wrote (emphasis is mine):

“We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see.

Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”

Buffett has investing acumen and privileged-access to deals that many of us do not have. But there are also times when common sense and patience are more important traits than acumen in making a great investment. Buffett himself said that no special insight was needed to value WPC back in 1973. What was needed for him to earn a smashing return were simple and attainable things: The right attitude and patience.

How many investors do you think have the patience to hold on through three years of losses? Not many, would be my guess. But Buffett did, and he was eventually well rewarded. 

Not every form of participation in the financial markets requires patience. But for market participants who look at stocks as a piece of a business and are investing on the basis of a business’s underlying value, patience may well be necessary, even if you have purchased shares of the best company at a bargain price. This is why Jeremy and I often talk about the importance of having a long-term investing mindset in this blog.

Buffett’s experience with WPC – of first losing, then winning – is far from an isolated incident. Another of my favourite investing stories has the same element. The story starts on 2 July 1998, when brothers David and Tom Gardner – co-founders of The Motley Fool, and two of my investing heroes – were invited to an American television programme called The View. In the show, the Gardner brothers were asked to name a stock for the programme’s new host to invest in and they happily obliged.

About six weeks later, the Gardners re-appeared in The View. But this time, they were booed by the live audience. David even found out later from his friend, a long-time follower of The View, that no guest had ever been booed on the show prior to this. It turns out that the Gardners’ recommended stock had fallen by a third in value in the six weeks between their first and second appearances in The View. But the brothers still had faith in the investment and urged the host to hold on for the long-term. 

I don’t know if The View’s host ever did invest in the company that the Gardners recommended. But if she did, and had she held on since 2 July 1998, she would likely be very happy today. The stock in question is the global coffee giant, Starbucks. 

In September 1997, Starbucks had less than 1,500 outlets and was mostly a domestic growth story in the USA. Today, it’s a bona fide global company with more than 33,000 stores in many different countries around the world. On 2 July 1998, Starbucks’s share price was US$3.54. About six weeks later (on 14 August 1998), it was US$2.40. A year after 2 July 1998, Starbucks’s share price was US$3.45, lower than when the Gardners first appeared in The View. Today, the coffee powerhouse’s share price is more than US$110. In a similar manner to WPC, Starbucks looked like a loser over the short-term, but turned out to be a world-class winner over the long-term.

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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 Starbucks. Holdings are subject to change at any time.

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:

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:

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.

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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.

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.

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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.