In an earlier article, we shared some pearls of wisdom from the imitable billionaire investor Warren Buffett on the importance of thinking like a business owner when trying to make smart investing decisions. It’s a great way to frame your thinking about investing – by focusing on the business’s performance, and not the share price – but perhaps the idea might seem abstract to you. So, here’s an example on how it might work. Shares of instant beverage manufacturer Super Group (SGX: S10) and telecom operator…
In an earlier article, we shared some pearls of wisdom from the imitable billionaire investor Warren Buffett on the importance of thinking like a business owner when trying to make smart investing decisions. It’s a great way to frame your thinking about investing – by focusing on the business’s performance, and not the share price – but perhaps the idea might seem abstract to you.
So, here’s an example on how it might work.
Shares of instant beverage manufacturer Super Group (SGX: S10) and telecom operator SingTel (SGX: S10) were worth S$0.78 and S$3.58 six years ago at the start of Sep 2007. At that point in time, these are some of the important financial figures that would have mattered to a business owner:
|Date: 3 Sep 2007||Super Group||SingTel|
|Sales for the last 12 months||S$232m||S$13.5b|
|Profit for the last 12 months||S$31m||S$3.87b|
For an investor who had invested $10,000 each in both companies, his share of sales and profits based on the proportion of the business he owns would be:
|Date: 3 Sep 2007||Super Group||SingTel|
|Number of shares acquired||12,820||2,793|
|Total number of shares existing||542.5m||15.9b|
|Share of Sales for the last 12 months||S$5,482||S$2,370|
|Share of Profit for the last 12 months||S$733||S$679|
If we now move forward six years, this is how the investors’ share of sales and profit would be like:
|Date: 1 Sep 2013||Super Group||SingTel|
|Number of shares acquired on 3 Sep 2007||12,820||2,793|
|Total number of shares existing||557.6m||15.9b|
|Sales for the last 12 months||S$556m||S$17.9b|
|Profit for the last 12 months||S$102m||S$3.57b|
|Share of Sales for the last 12 months||S$12,791||S$3,152|
|Share of Profit for the last 12 months||S$2,356||S$628|
It’s easy to see how the investor’s share of sales and profit in Super Group has more than doubled and tripled respectively. On the other hand, the corresponding figures from SingTel have more or less or stalled.
Both shares have beaten the Straits Times Index’s (SGX: ^STI) 10.6% decline from 3,386 points on 3 Sep 2007 to 3,029 points on 1 Sep 2013, so they can be proudly tagged as market beaters.
But, SingTel’s trading at S$3.51 on 1 Sep 2013, essentially unchanged from six years ago, while Super Group’s shares have more than quintupled to S$4.34.
When viewed from the vantage point of how the share of an investor’s sales and profit made by the companies have changed over the years, the reason for the big discrepancy in share price performance is not hard to spot.
The share of Super Group’s profits for the investor has grown much larger relative to his cost, hence making his initial investment a lot more valuable. The same can’t be said for the investment in SingTel, where the investor’s share of the telco’s profit actually shrank, thus causing his original investment to be – arguably – less valuable.
Foolish Bottom Line
It’s not always easy to think like a business owner and focus on the numbers that matter. We do not normally think of us as having a stake in a company’s profits as we can’t actually ‘pocket’ it (but it should be noted that those profits are real and they do belong to us).
Because of that, a slight tweak on the way we look at our investment – by putting our share of sales and profits into context in terms of our ownership of the business and how they’ve evolved, for instance – can go a long way in helping us adopt the mind-set of a business owner.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo , Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
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.