“Does having beer in our diet help one become a prudent investor?” That’s one of the questions that popped up during our Ask a Foolish Question exercise. It’s fun (I love a mug of good beer!), so we’ll take a stab at it. Thing is, having a beer holds the possibility of making you a better investor, though not necessarily a prudent one. Having a good ol’ mug of ice-cold beer at the end of a long day at work is not only one of the best feelings in the world (for me, at least), it also enables beer-drinkers to…
“Does having beer in our diet help one become a prudent investor?”
That’s one of the questions that popped up during our Ask a Foolish Question exercise. It’s fun (I love a mug of good beer!), so we’ll take a stab at it.
Thing is, having a beer holds the possibility of making you a better investor, though not necessarily a prudent one. Having a good ol’ mug of ice-cold beer at the end of a long day at work is not only one of the best feelings in the world (for me, at least), it also enables beer-drinkers to keep an eye out for popular beer-brands and to do some ‘product-research’.
You see, Peter Lynch, a superstar fund manager with a phenomenal track record, was an advocate for ‘buy what you know.’ It entails digging into the companies providing the popular goods and services that we use to hunt for investing opportunities.
And if you’re a beer drinker who’s intimately familiar with different brands of beer and their companies, there’s your slight advantage over someone who doesn’t drink beer and has no clue about beers and the companies that brew them (of course, the same can be said about the one half of the population who knows so much more about the hottest bags, purses, wallets and make up colours; atomic tangerine-coloured lipstick, anyone?).
Some beer companies prove themselves to be surprisingly resilient in the face of a global economic slowdown making them perhaps slightly better investments when compared to cyclical or less recession-proof companies.
For example, Asia Pacific Breweries, owner of the Tiger Beer brand, actually saw its sales grow throughout the Great Financial Crisis of 2007-2009, as shown in the table below:
|Financial Year Ended||Sep 2006||Sep 2007||Sep 2008||Sep 2009||Sep 2010|
The company used to be publicly listed in Singapore but was eventually acquired by Dutch brewer Heineken earlier this year for S$53.00 per share and got delisted from the Mainboard exchange on 22 Feb 2013. APB’s shares rode on its strong corporate performance to give investors a 310% return in the five years ending on the date of its delisting.
That’s a fantastic gain, even more so when we consider that the Straits Times Index (SGX: ^STI), a barometer for the Singapore stock market, only returned 8% in the same period.
Malaysian-listed Danish brewer Carlsberg is another example of a recession-proof beer-business with its revenue-trend over the past few years hardly betraying any hints of a global economic crisis, as seen in the table below:
|Financial Year Ended||Dec 2006||Dec 2007||Dec 2008||Dec 2009||Dec 2010|
Now, coming to the topic of a prudent investor, it’s indeed a slightly unusual label. Usually, investors like to label themselves as a value investor, growth investor, value-growth investor, or even a momentum investor. So what exactly might a prudent investor be?
The word ‘prudent’ stems from ‘prudence’ which is defined by Merriam-Webster as the “careful good judgement that allows someone to avoid danger or risks.” In that regard, perhaps, a prudent investor is someone who truly understands the risks of investing and so in turn, fully grasps the idea of a margin of safety.
It’s a very important concept in investing, so much so that Benjamin Graham, the intellectual founder of the discipline of value investing once wrote that:
“Confronted with a like challenge to distil the secret of sound investment into three words, we venture the motto – Margin of Safety.”
Morgan Housel from The Motley Fool described it as such,
“Margin of safety is simply the distance between your predictions coming true and needing those predictions to come.”
By giving ourselves a lot of room for error when making investing decisions – investing decisions are in essence forecasts about the future performance of individual businesses – we lessen the risks we face, hence the prudence.
For example, a share with expectations of great growth baked into it by the market through a high valuation lessens the margin of safety for investors. Any slight disappointment in its growth will likely send its shares tumbling. That’s what has happened to Sembcorp Marine (SGX: S51) and Keppel Telecommunications and Transport (SGX: K11).
Both shares have been long-term losers since Oct 2007 as the growth in their corporate results couldn’t keep up with the high valuations their shares were trading at during that point in time.
On the other hand, investors who decided to invest in the STI-tracker, the SPDR STI ETF (SGX: ES3), back on 10 March 2009 would have made an investing decision that carried with it a great margin of safety. Back then, the Great Financial Crisis was still in full swing and the STI was at 1,455 points, having fallen by almost two-thirds from its pre-crisis peak of 3,876.
The decline in the index was gut-wrenching. But, when it bottomed on 10 March 2009 at 1,455 points, it also offered investors a great margin of safety. At that point in time, it carried a historical Price-Earnings ratio of around 6, which was a very low figure.
There was plenty of room for things to continue going wrong but yet still leave investors relatively unscathed. Turns out, the index went on to gain almost 120% to around 3,200 points today as the global economy gradually improved, though there are still many signs that point to a situation where the economy’s still far from being in the pink of health.
The SPDR STI ETF followed suit with very similar gains as it more than doubled from S$1.51 on 10 March 2009 to its current price of around S$3.24. The margin of safety was at work, with the ETF’s low valuation (the index tracker’s PE would be very similar to the index itself) giving investors tasty gains in spite of an economy that many believe has plenty of room for improvement.
Foolish Bottom Line
At the end of the day, I’m not too sure about how beer might make me a prudent investor as it might not induce me to adhere even more closely to the principle of a margin of safety. But even if it doesn’t, I know I’ll still get to enjoy a tasty beverage (you know I like it!) that might yet help me uncover another great investment like what APB proved to be.
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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.