What a Bar of Soap Can Teach Us about Investing

Investor William Smead recently wrote, “As many advisors have told us, your investment portfolio is like a bar of soap. The more you handle it, the smaller it gets.”

Between 11 April 2002 and 30 April 2014, the SPDR Straits Times ETF (SGX: ES3) has achieved a compounded annualised return of 8.54% with dividends reinvested. Put another way, the exchange traded fund (ETF) has returned 168% in a little over 12 full years. As the ETF aims to mimic the returns of the Straits Times Index (SGX: ^STI), the most widely-followed share market barometer here in Singapore, it can be safely said that the performance of Singapore’s share market as a whole hasn’t been too shabby at all in those dozen years.

As nice as the returns of the SPDR STI ETF has been, it should be noted that there can be a huge difference between an investment’s returns and the returns that an investor can get from that investment. There are no studies done so far – as far as I can tell – on any possible discrepancies between the SPDR STI ETF’s returns and those of its investors. But, I would bet that there would be a big difference if any study were ever conducted, judging from the experience of investors elsewhere around the world.

In the USA, the S&P 500 – a measure of the American stock market, much like our Straits Times Index here – had returned roughly 8% per year on average at the end of 2012 over the past 20 years. At an 8% annualised return over 20 years, every $1,000 investment would have become $4,660. So, shares in the USA, as a whole, have done pretty much a-okay for themselves. And yet, the average investor in share-focused mutual funds (mutual funds are the equivalent of unit trusts here) there have earned just a smidge above 4% in the same time frame.

In fact, for each rolling 20-year period that ended between 2003 and 2012, the investment research outfit DALBAR realised that equity fund investors had lagged the S&P500’s 20-year annualised returns by a huge margin (it was as wide as 9.47% in 2003!). DALBAR’s conclusion for the average investors’ underperformance, as reported by Forbes, was this:

No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behaviour than on fund performance. Mutual fund investors who hold on to their investment are more successful than those who time the market.”

Investors who time the market are often making trades in a hurry, trying to buy and sell in anticipation of each market peak and trough. But with the evidence that DALBAR has presented, investing is like soap – “The more you handle it, the smaller it gets.”

Back in October 2010, I had invested in shares of video games maker Activision Blizzard (NASDAQ: ATVI) on three basic premises: 1) The company was the best-in-class operator within its industry judging from its operational metrics; 2) the company has a history of innovation and the ability to create highly-sought after game franchises (Diablo, Starcraft, Call of Duty, World of Warcraft, and Skylanders anyone?); and 3) the company has a portfolio of very valuable intellectual property with its games and characters.

After my purchase at US$10.30 per share, the company had basically done nothing for more than two years before it started climbing in 2013. Today, it’s some 80% higher at US$20.87 each, beating the SPDR S&P 500 ETF (an ETF that tracks the S&P 500) by close to 20%.

Source: Google Finance; Red line’s for SPDR S&P 500 ETF, Blue line’s for Activision

What’s the point of bringing this up? The point isn’t to enumerate on the merits of Activision Blizzard as an investment or to toot my own horn. It’s to bring home the point that patience is often required in investing if big gains are to earned.

Like Smead says, the more you handle soap, the smaller it gets. It’s the same with investing.

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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 Activision Blizzard.