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When Long-Term Investing Fails

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It has been close to six years since the start of the Great Financial Crisis of 2007-2009, during which the Straits Times Index (SGX: ^STI) bottomed on March 2009 at 1,456 points. Since then, it has climbed by 114% to 3,118 on 27 June 2013, representing a great return for investors who had the foresight to invest in the STI through an index tracker like the SPDR STI ETF (SGX: ES3) at the market-bottom.

But, for those who had invested at the index’s pre-crisis peak of 3,875 on 11 October 2007, they’re still waiting to break even after almost five and a half years. To those investors, they’ll likely argue that long-term investing has failed them.

To strengthen their case they might even throw out more examples of dead money, such as; logistics and data centre operator Keppel Telecommunications & Transportation (SGX: K11); and marine engineering firm Sembcorp Marine (SGX: S51).

Company 11 Oct 2007 27 Jun 2013 % Change
Keppel T&T $4.70 $1.38 -70.6%
Sembcorp Marine $5.35 $4.29 -19.8%

Those two companies were certainly not chronic loss-makers that are destroying shareholders’ value. In fact, both companies were churning out larger profits for their shareholders – Keppel T&T’s trailing-12-month earnings per share (TTM EPS) increased by 20% from 8.4 cents to 10.1cents. Meanwhile, Sembcorp Marine’s TTM EPS actually jumped by 78% from 14.6 cents to 26.1 cents. So, what caused these losses?

The answer might be clearer once we juxtapose the financial numbers of those two companies with that of health care provider Raffles Medical Group (SGX: R01). RMG beat the market decisively in the time period with a 101% return as its shares grew from $1.51 to $3.04, even though its TTM EPS had a smaller increase of 62% (from 6.7 cents to 10.8 cents) as compared to Sembcorp Marine.

Company 11 Oct 2007 27 Jun 2013
TTM PE TTM PE
Keppel T&T 56 13.7
Sembcorp Marine 36.6 16.5
RMG 22.6 28.1

Turns out, Keppel T&T and Sembcorp Marine carried very high earnings multiples on their shares on 11 October 2007, implying – arguably – unreasonably high expectations on future earnings growth. To show how unreasonable the expectations were, let’s take Keppel T&T as an example. Its top-line was shrinking in consecutive years from 2003 to 2006 (from $242m to $93m), painting a bleak picture of future growth and yet it carried an earnings multiple of 56!

In contrast, RMG had a more reasonable earnings multiple for a health-care provider with a defensive business, strong balance sheet carrying net-cash of $115m and earnings that almost doubled from 2003 to 2006.

Foolish Bottom Line

Companies like Sembcorp Marine and Keppel T&T might be poster boys for why long-term investing can fail, given their negative returns after close to six years. But, RMG’s experience also showed just why long-term investing can work.

The broader market has not sufficiently recovered from the crash brought on by the GFC. And yet, investors who invested in the health care provider before the crash have doubled their money. Solid business execution (evidenced by growing top and bottom-lines) and a reasonable-price-in-relation-to-future-prospects ensured that investors with the mental fortitude to hang on tight through a market meltdown came out ahead.

Long-term investing is likely to fail when investors are indiscriminate about the relationship between a business’s underlying fundamentals and future expectations. But then again, those traits make for a poor investing experience anyway, regardless of a person’s time horizon.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.