I had a conversation with a friend of mine recently who works as a remiser and he was telling me, “Clients often think that investing in a share is a one-time affair. They place $X in it, and that’s it.” That caught my attention as I think that investing in a share – in any share for the matter – need not be a one-time affair. It’s already gone up since I bought it, there’s no longer any value left! Perhaps, one important reason people think that investing in a share is a one-time affair is because if the…
I had a conversation with a friend of mine recently who works as a remiser and he was telling me, “Clients often think that investing in a share is a one-time affair. They place $X in it, and that’s it.” That caught my attention as I think that investing in a share – in any share for the matter – need not be a one-time affair.
It’s already gone up since I bought it, there’s no longer any value left!
Perhaps, one important reason people think that investing in a share is a one-time affair is because if the share starts to run up in price, they think it can’t run on further. But that need not be the case.
Conglomerate Jardine Strategic Holdings (SGX: J37) was worth US$2.60 a share at the start of 2003. After five years, on 2 Jan 2008, it’s selling at US$15.90. That’s a 512% gain! Surely, investors looking at the share on Jan 2008 have missed the boat, right?
Well, not quite. As of 15 July 2013’s close, JSH’s shares are worth US$36.55 apiece, representing a 130% increase from Jan 2008.
There are yet more examples of shares that continually turned up at the harbour even as investors mistakenly think they might have missed the boat.
Healthcare provider Raffles Medical Group (SGX: R01) was selling for S$0.48 a pop on 2 Jan 2005. Just three years later, on 2 Jan 2008, it was worth S$1.51. The company’s shares have already tripled in three short years, surely there’s not much room left for it to run?
Tell that to RMG, whose shares were last seen at $3.24 on 15 July 2013, up by 115% from the start of 2008.
Here’s one more. From 2 Jan 2003 to 2 Jan 2012, instant beverage manufacturer Super Group (SGX: S10) had gained 500% as its shares went up from S$0.22 to S$1.32. So, after a great climb in nine years, what more can it possibly do for investors?
Turns out, it can do a lot – shares of Super Group went on to increase by another 258% to $4.72 at 15 July 2013’s close.
I really could go on, but you get the drift.
Why it makes sense to invest more than once in the same idea
So, shares can always move up higher even after a stupendous climb. But, that’s not the real reason why it’s not a bad idea for investors to consider investing in the same company even if a prior investment had already been made.
The real reason is, even if a company’s shares are now worth a lot more in price, it might be carrying even greater intrinsic value than before.
For example, let’s assume that share XYZ’s selling for $10 a share, but carrying $30 in intrinsic value. But, when it’s risen to $40 a share, its intrinsic value might have gone up to $150, making XYZ at $40 worth even more than what it was at $10.
That’s a very simple explanation of why it might make sense to continually invest in the same company if its relationship between price-and-value is superior to other opportunities out there.
Of course, prudent diversification is also very important, but that does not mean that an investor investing in the same shares multiple times – while holding onto all previous purchases – is not diversified.
Rather, the message here is that, it can be folly to forego buying shares in companies where we already are invested, just because its price has gone up.
Foolish Bottom Line
Over time, companies evolve and as a result, their intrinsic value – what a business really is worth, which may be very detached from its market price – can change as well.
Don’t anchor on what the company’s shares have done. Look at how its business has changed because that’s where value – and consequently, shareholder returns – is ultimately derived from.
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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.