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Three Pearls of Wisdom for a Life-Time of Investing Success

Born in 1870 and living till the ripe old age of 95, Bernard Baruch might not be a name that rings a bell for most Singaporean residents who are interested in the stock market. But, he was indeed a well-known U.S.-based investor and political consultant – among other accomplishments – during his time. And, he does have an interesting story related to him that might well be of interest to any keen student of investing.

In a possibly-apocryphal tale, Baruch was once asked in a party by a woman to name a few stocks that she should be buying once she’s home. Instead of giving her some stock tips, Baruch twisted the question and told her this: “I’m not going to give you a few stocks. I’m going to give you a few principles. Just use these and I think you’ll end up succeeding.”

Those tips were: 1) Only invest in companies whose products you buy every 30 days or less, throw them away and buy them again; 2) How innovative is your company in creating new products and what’s their ability to create pricing power around the new offering; and 3) Are people genuinely attracted to the brand?

While the veracity of the tale may or may not be true, the wisdom behind those tips could withstand even a trial by fire.

Repeat purchases begets investing success

Starting with the first tip, when you have companies whose products you buy and use repeatedly, it can provide such companies with extremely dependable revenue streams that can allow them to prosper over the long-term and come out ahead even during rough economic climates. When you think of companies serving a product like fast food or gourmet coffee, it’s hard to think beyond companies like McDonald’s and Starbucks respectively. People consume the food and drinks from both companies – often at least once every 30 days – and then buy them again.

It’s for reasons like these that McDonald’s and Starbucks have gone up by 149% and 1,057% respectively since the start of 2000 even as the S&P 500, a broad American stock market index, has gained only 27%.

Innovation can power business success

When a company is able to constantly create innovative products while giving them pricing power, it can generate multiple revenue streams for itself and not lose relevance even as the world slowly (or quickly) evolves.

A company like Amazon.com (NASDAQ:AMZN) is a great example of how such companies can succeed. It started off as just an online book retailer, but has since become almost synonymous with the online retailing of almost any good imaginable in the USA. That’s in addition to it now providing an online movie and video streaming service; renting out excess cloud computing server capacity under its Amazon Web Services (AWS) banner; and even exploring the use of flying drones for product delivery, among other innovative ideas. Since 2000, its shares have soundly beaten the S&P 500, gaining some 327%.

A brand that’s genuinely attractive to consumers can do wonders

When consumers become loyal and attracted to a company’s brand of products, there’s a huge captive audience for it to tap into that will not go away easily. While the U.S.-based Mexican-themed restaurant operator Chipotle Mexican Grill’s (NYSE: CMG) concepts might seem easily replicable – it’s not that tough to make a tasty burrito – the Chipotle brand itself is seared deeply into consumers’ minds with the company’s Food-with-Integrity philosophy. With same store sales’ growth of 13.4% in the first quarter of 2014 even as the USA endured a really tough winter, that’s some evidence of strong loyalty and an attractive brand.

In fact, with a great same store sales growth that has averaged 8.7% since 2007, Chipotle Mexican Grill’s shares have gained some 812% from the start of that year even as the S&P 500 has moved up by only 31%.

The Singapore examples

As Bernard Baruch’s an American investor, it seemed only fitting to have used American companies as examples. But, that’s not to say that there are no local companies that fit the bill. Companies like Breadtalk (SGX: 5DA) and Super Group (SGX: S10) do, in one way or another.

Being a Food & Beverage (F&B) retail outlet operator with brands like Breadtalk, Din Tai Fung, Food Republic and Ramen Play under its belt, Breadtalk’s a quintessential repeat-purchase type of company. And in fact, anyone with a keen eye who’s walking around Singapore’s retail malls would be able to see the crowds in action at both Breadtalk and Din Tai Fung, among the company’s other concepts.

With earnings-per-share that has grown by 1,082% from 0.41 Singapore cents in 2003 to 4.83 cents in 2013, Breadtalk’s share price has jumped by some 350% to its current level of S$1.22 since the start of 2004. And that of course, has been a market-beating performance, with the Straits Times Index (SGX: ^STI) only gaining 84% to its current level of 3,255 points in the same time period.

With Super Group’s sale of instant beverages under the brands of Super and Owl among others, it’s also a repeat-purchase type of company. And while brand loyalty might perhaps not be as strong, given fierce competition from international competitors like Nestle, there’s evidence of an innovative spirt within the company.

Prior to 2008, the company’s focus was almost always on its branded consumer products. But since then, Super Group had started diversifying into the manufacture and sale of beverage-ingredients like non-dairy creamer and soluble coffee powder (collectively termed as the Food Ingredients segment) to other beverage makers. Growth in that business segment has been stellar, with revenue more than tripling from S$58.3 million in 2010 to S$192.5 million in 2013. At last count, the Food Ingredients segment made up 35% of overall sales, up from 28% in 2010.

The company has parlayed repeated consumer purchases and its innovative spirit into growing profits. Within the same timeframe as Breadtalk, Super Group has seen its earnings per share spike by 580% to S$0.179. Meanwhile its shares have been a solid market-beater, gaining some 800% to S$3.51.

Foolish Bottom Line

In the continuation of Baruch’s tale, the lady whom he passed down the pearls of wisdom to apparently went on to be really successful investor, leaving behind millions when she passed away. Maybe – just maybe – those three simple principles espoused by Baruch could really help bring a lifetime of investing success to any individual who chooses to heed its wisdom.

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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 Starbucks, Amazon.com, Chipotle Mexican Grill, and Super Group.