Buy-and-hold works – up to a point

14 Jan 2013 09:00
TEH HOOI LING

 Of the 16 stocks listed in the Singapore market since 1973, Asia Pacific Breweries is the best performer currently. Its share price has appreciated by 9.7 per cent a year over the past 40 years. But it was not always the leader of the pack. - SPH
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It’s very hard for us to think outside the environment we are in, a learned friend told me. In other words, many times, we are products of our environment.

Take someone who, early in his or her investment career, went through the boom years of the 1920s only to see everything wiped out during the Great Depression.

Most likely, such a person would have a rather pessimistic view of the stock market.

In contrast, a person who knows only of bull markets would have been conditioned to think that the market can only go up.

Hence, it is always instructive to study history, to talk to people with lengthy experience in their chosen fields.

I have this friend who I reckon is in his 60s. He used to run his own construction business and is now retired. He said he was an ignorant young man in the 1980s and lost money investing in a fund. He then resolved to educate himself about investment. Like most value investors, he idolises famed investor Warren Buffett.

Having experienced and seen the results of making wise investments, this friend is fervent about convincing others of the importance of learning that skill.

At his age, he still buys and reads books such as Trump Strategies For Real Estate: Billionaire Lessons For The Small Investor and Accounts Demystified by Anthony Rice.

Three years back, he asked me to help edit a two-page message that he wanted to circulate to the younger people around him. In it, he gave the example of his cousin.

Back in 1958, the cousin earned less than RM200 a month as a primary school teacher. But she put some savings away every month. By the early 1960s, she had accumulated a sum of money that she could invest in stocks.

“She did the ‘right’ thing in investment,” wrote my friend. “She chose the ‘good’ stocks – companies with good businesses. She held on to the stocks for the long term.”

Over the years, she bought more of the stocks with additional savings as well as the dividends received from the stocks she held. Her stockholding also grew as the companies distributed bonuses and issued rights.

“Thirty years later, she had become a millionaire. She managed to send her kids to England to study. Despite her wealth, she is still very careful with her money. As a retired civil servant, she receives a pension of RM1,000 a month. But dividends from her stocks come to RM3,000 a month.”

The example is heartening. But again, I think it’s important to put a context to it. The period during which the cousin grew her wealth ran from the 1960s to the 1990s. Perhaps during that period, a buy-and-hold strategy worked. Would it still work today?

I tracked down stocks that have been listed in the Singapore market since 1973. There are 16 – some counters might have been delisted, for good or bad reasons.

So there is a survivorship bias, that is, only the good or viable ones remain.

In any case, even among the 16 stocks, the performance varies. As of today, the best performer over the past 40 years has been Asia Pacific Breweries (APB). Its price, excluding dividends, has appreciated by 9.7 per cent a year.

It has grown by some 40 times over the past 40 years. For those who reinvested the dividends back in the stock, the return would have been a lot higher.

Jardine Cycle & Carriage was the second-best performer, with price appreciation of 9.1 per cent a year. It was followed by Fraser & Neave (F&N) with 7.8 per cent. For the banks, prices grew by about 5 per cent a year.

Auric Pacific Group fared the worst. Back in 1973, it was trading at about $1.50. At the start of this year, its shares changed hands at $1.13. WBL, Haw Par and United Engineers all managed to chalk up price appreciation of less than 2 per cent a year.

The thing is, APB wasn’t the leader of the pack every step of the way. In the early 1980s, Straits Trading had its days in the sun.

By the early 1990s, Natsteel (now NSL) was ready to take its turn. The new millennium saw the spotlight fall on DBS Group Holdings. And now it is APB that has caught the market’s fancy.

The market is such that it will be fascinated by different themes or the latest fads at different times. During any of these episodes, it might not be entirely rational in pricing stocks.

At such times, when one of your stocks catches the fancy of the market, and you think the market price has gone far beyond the fair value of the stock (remember the valuation metrics we discussed in the past few weeks?), it is not a bad idea to lock in your profits.

Remember, a stock that falls 50 per cent will need to recover by 100 per cent before it gets back to its old levels.

To illustrate how important it is to protect your downside, I charted the performance of the Straits Times Index as calculated by Thomson Datastream from 1973 up to last week.

The price appreciation was 3.9 per cent a year. If you had invested $10,000 in the index from the start, that sum would have grown to $47,000 today. Assuming you missed the 10 worst trading days of the past four decades – the most recent was in October 2008 when the market fell 8 per cent – your performance would have been boosted to 7.3 per cent a year. Your $10,000 would have grown to $165,200.

In contrast, if you had missed the 10 best days, that $10,000 would have grown to just $17,100 – a gain of 1.4 per cent a year.

However, if you buy when market valuations are low, there is a high probability that you will avoid the worst days in the markets and yet not miss out on the best days.

The key message that investors should never ever forget is to protect their downside. Let the upside take care of itself.

The strategies that we have talked about in the past few weeks – and that appear to work well – have been about buying low-valuation stocks, taking profits and redeploying the capital to the next batch of low-valuation stocks.

There appears to be persistence in the performance in these kinds of strategies.

hooiling@sph.com.sg

 
When to lock in profits

The market is such that it will be fascinated by different themes or the latest fads at different times. During any of these episodes, it might not be entirely rational in pricing stocks. At such times, when one of your stocks catches the fancy of the market, and you think the market price has gone far beyond the fair value of the stock, it is not a bad idea to lock in your profits

http://www.btinvest.com.sg/system/assets/10301/file1.png?1358125506