What You’ll Really Need To Invest Well

Over the past 15 years since 5 March 1999, the healthcare operator Raffles Medical Group (SGX: R01) has had capital appreciation of some 481% to its current price of S$3.25 per share. In other words, it has displayed a noteworthy compounded annual rate of return of 12.5% for 15 years.

If the gains from reinvested dividends were tacked on, the company’s total returns become even more impressive at 941%, or an average annualized return of 16.9%.

In contrast, the Straits Times Index (SGX: ^STI) in Singapore has gained just 115% in price in the same time period to its current level of 3,112 points. Looking at that, it’s obvious to point out that Raffles Medical Group is a true market beater over the long-term.

But here, an interesting question arises: Given Raffles Medical Group’s strong capital appreciation over the years, has it been all smooth-sailing for the company?

Turns out, the answer’s no. Assuming an investor had invested in Raffles Medical Group some 15 years ago on 5 March 1999 at S$0.56 per share, he’ll quickly find himself underwater by more than half as the company’s shares dropped to S$0.27 by mid-Dec 2001. It would take another four-plus years before the healthcare operator’s shares finally breached its March 1999 price on 13 Feb 2006.

It then climbed steadily to a high nearing S$1.60 per share in 2007 before the effects of the Global Financial Crisis kicked in and caused a steep drop in the company’s share price to a low of S$0.55 in Nov 2008.

Of course, the company’s share price eventually rebounded and have since climbed steadily to where it is today.

If we look back at the experience of Raffles Medical Group’s shares starting from 5 March 1999, we see a company who ended up selling at virtually the same price some nine-and-a-half years later. And yet, an investor who had managed to hold on long enough would have been able to reap the great rewards today.

This just goes to show what an essential ingredient patience can be in generating strong long-term investment returns.

But, it also begets the question: How should investors know if a share’s worthy of long-term devotion? Well, here’s the thing. Despite a flat market price from March 1999 to Nov 2008, the productivity of Raffles Medical Group’s business was anything but flat in those nine-and-a-half years. Take its earnings for instance: In March 1999, the company had profits of S$2.6 million; in Nov 2008, those profits had ballooned 12 times to S$31.5 million. And today, Raffles Medical Group’s profits stand at S$85 million.

An investor with a focus on the productivity of Raffles Medical Group throughout the past 15 years might have been encouraged to hold on despite a seemingly disappointing share price return over a very long stretch of time.

And, this brings me to a piece of sage advice shared in Warren Buffett’s latest 2013 annual letter for Berkshire Hathaway shareholders. In it, he mentioned: When investing, the focus should be on the productivity of an asset, not its price.

There are times when the market goes into a severe depressive mood and offers ridiculously low prices for very productive assets. Those are great times to buy and very bad times to sell. On the other hand, the market could, at the snap of a finger, enter into a euphoric mood and start quoting ridiculously high prices for unproductive assets. Those are horrible times to buy and perhaps a great time to sell.

While all that seems easy enough, the sad truth is that our emotions can often play cruel pranks on us and make us buy and sell shares at the most inopportune moments. But here’s also where an insistence on focusing on a business’s productivity instead of its wildly-gyrating share price can make a difference – perhaps even a big difference.

All told, when investing, patience and a focus on an asset’s productivity are paramount. It’ll pay to not forget that.

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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 writer Chong Ser Jing owns shares in Raffles Medical Group and Berkshire Hathaway.