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One Easy Way to Become a Better Investor

Billionaire investor Warren Buffett had released his annual 2013 Berkshire Hathaway shareholder letter on a Saturday a few weekends back. It’s chockfull of investing wisdom – we’ve truly been spoiled by Buffett – but there was one particular piece of advice that stood out head and shoulders to me.

In his letter, Buffett wrote about two investments he had made in the late 1980s and early 1990s involving a farm in Omaha, Nebraska in the USA, and a piece of real estate in New York City. When he purchased those two investments, his focus was on what they “would produce and [he] cared not at all about their daily valuations.”

He then followed up with the advice that I particularly value: “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

In the 1970s, more than three decades ago, Buffett had given advice to Katherine Graham, then the chief executive of the American company, Washington Post, which was still heavily involved with newspapers.

Graham wanted to know how she should be investing her company’s pension funds, to which Buffett said shares would likely be good investments on the caveat that the basis for evaluation of a good or bad investment should be done like how she would evaluate a potential acquisition of another operating company – i.e., her eyes should be on the playing field (the business performance of the company) and not on the scoreboard (the subsequent movement of its share price).

Graham took the advice to heart and the Washington Post eventually ended up with a surplus after covering for its pension obligations even while many other American companies were struggling with their pensions.

Buffett’s advice to Graham and his recent writings in his 2013 shareholder letter are great pieces of wisdom for individual investors like you and me.

Over the past 22 years since the start of 1992, companies like Jardine Cycle & Carriage (SGX: C07), City Developments (SGX: C09), Singapore Press Holdings (SGX: T39), Keppel Corporation (SGX: BN4) and United Overseas Bank (SGX: U11) have delivered some nice multi-bagger returns.

Company

Price: 3 Jan 1992

Price: today

% Change

Jardine C&C

S$5.95

S$40.97

589%

City Dev

S$3.37

S$9.49

182%

SPH

S$1.23

S$4.15

239%

Keppel Corp

S$2.96

S$10.80

264%

UOB

S$4.40

S$20.61

368%

Source: S&P Capital IQ

While those are some nice gains over the years, these companies’ share price gains were anything but smooth. Along the way, they’ve each gone through severe ups-and-downs to get to where they are now. For instance, at the start of 2002, Jardine Cylce & Carriage and Keppel Corporation’s shares were down by 47% and 56% respectively since 1992; investors keeping their eye on the scoreboard would have a hard time swallowing these volatile and violent movements.

But, investors with an eye on the playing field would have found it much easier to carry on playing the game: Jardine Cycle & Carriage and Keppel Corporation were more productive in 2002 than they were in 1992 as their earnings per share figure in 2002 was 41% and 23% higher, respectively, as compared to 1992.

In fact, the share price gains delivered by those five companies over the past 22 years did not come in a vacuum. They appeared because the business performance delivered by the companies had improved greatly. This can be seen in how the earnings and book value per share of the companies have changed since 1992.

Jardine C&C

City Dev

SPH

Keppel Corp

UOB

EPS:
3 Jan 1992

US$0.36

S$0.083

S$0.117

S$0.183

S$0.31

EPS:
Today

US$2.57

S$0.737

S$0.267

S$1.02

S$1.84

% Change

612%

787%

129%

458%

495%

Book value:
3 Jan 1992

US$2.49

S$1.28

S$0.44

S$1.79

S$2.75

Book Value:
Today

US$11.98

S$8.63

S$2.10

S$5.37

S$15.36

% Change

381%

575%

373%

200%

458%

Source: S&P Capital IQ

All told, the focus when investing should be on the current and future changes in the productivity of the asset we want to buy, and not on probable changes in its future pricing. When we place an emphasis on selecting assets that stand a great chance of becoming a lot more productive in the future while paying a reasonable price for it, we shouldn’t be scared out of them even if there are wild swings in their quoted prices on a day-to-day basis as future price changes for those assets would likely work in our favour over the very long-term.

As individual investors, a realisation of those facts and then subsequently putting them into practice is the one easy way we can all become better investors.

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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 Berkshire Hathaway.