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Why Investors Should Avoid Looking At the Market

Ser Jing - Why Investors Should Avoid Looking At the Market (pic) It’s been almost six years since the Straits Times Index (SGX: ^STI) peaked at 3,876 on 11 Oct 2007 before the Great Financial Crisis of 2007-2009 started and torpedoed everything in its path. The STI went on a downward spiral all the way till it bottomed on 10 March 2009 at 1,456 points.

Since then, the STI has climbed by 118% to close at 3,153 on 2 July 2013. Due to the ubiquitous nature of the index being used as a proxy for the overall stock market in Singapore, it is tempting to equate the aggregated experiences of investors here with the movement of the STI.

But, that can be a misleading conclusion.

A winning portfolio even as the market’s bleeding

At 2 July 2013’s close, the STI is still down by 18.1% from its Oct 2007 peak. And yet, an investor who invested equal amounts into the following five companies at the date of the STI’s peak would now be sitting on a 184% gain on his overall portfolio.

Company 11 Oct 2007 2 July 2013 % Change
Super Group (SGX: S10)

S$0.88

S$4.41

401%

Vicom (SGX: V01)

S$1.78

S$4.70

164%

Dairy Farm Holdings (SGX: D01)

US$5.10

S$11.99

135%

Raffles Medical Group (SGX: R01)

S$1.51

S$3.22

113%

Jardine Cycle & Carriage (SGX: C07)

S$20.20

S$42.07

108%

Average Gain

184%

Lessons: the businesses matter!

Some might argue that it’s just hindsight at work and hindsight’s always 20-20. That’s true, but what’s important here is the lesson that investors can get from this exercise.

These companies are involved in disparate business activities; Super Group makes instant beverages; Vicom runs vehicle inspection centres along with providing commercial inspection and testing services to different industries; Dairy Farm’s a retailer with 5,600 outlets in Asia; RMG operates hospitals and medical centres; and Jardine C&C has substantial interests in the automobile and palm oil industry in Indonesia.

And yet, there’s a common thread tying these companies together – their businesses have done very well from Oct 2007 to now.

The graph below showcases how much these company’s profits have grown, over the more-than-seven-years ending July 2013, in relation to what they were earning back in 2006.

investors avoid looking at market graph

These companies were simply making a lot more money in July 2013 compared to what they did in 2006 (Dairy Farm’s earnings showed the lowest cumulative growth of 213% in 2012 while Raffles Medical Group’s profits jumped the fastest at 374%), which made their businesses a lot more valuable.

Over the long-term, companies which are generating substantially higher profits become more valuable and their shares in turn, are worth more.

Of course, that’s a simplistic way of looking at things. Valuations do matter, as does other aspects of the fundamentals of a business. But, by and large – to quote Warren Buffett – “if the business does well, the stock eventually follows.”

What stock-market investing actually is

Most of the time, when people invest in stocks, they are not looking at investing in the entire market. Instead, they are focused on only certain companies.

And the important thing is, if these companies are good businesses that we can depend on to generate sustainable long-term growth in profits and that we could invest in them at reasonable prices, then there’s a good chance our portfolio can do well regardless of what the market’s doing.

Stock-market investing is not about investing in the entire market through index trackers (though there are certainly valid reasons for doing so). It’s about finding the aforementioned ‘good businesses’ and investing in them for the long-term.

Foolish Bottom Line

These five companies, despite their strong gains from Oct 2007 to July 2013, endured severely bumpy rides in their share prices during the Great Financial Crisis. For example, RMG was slashed by more than 65% from Oct 2007 to the Crisis’s trough. But its strong underlying fundamentals shone through in the end.

Sometimes, it’s easy to forget that we’re looking at little pieces of ownership in a living, breathing business when we see stock tickers flash across our screens. But, as investors, the onus is on us to invest in businesses, not tickers. And that’s why investors should avoid looking at the overall market, and instead, focus on individual businesses.

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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 owns shares in Super Group.