The Share Market’s Greatest Secret: Revealed

In February 2008, The Motley Fool’s co-founder David Gardner penned the following in the opening paragraph of his article titled “The Greatest Secret of All” (emphasis his):

 “The greatest secret to easy riches in the stock market is contained right here, below.”

That’s what I would like to proclaim here as well.

David’s secret

But first, here are some excerpts from David’s article on how money’s really made in the share market.

“On my 25th birthday, I discovered the truth. The powerful impression it made on me changed my investing forever, and my investment returns went from so-so before that to skyrocketing ever since…

…When I turned 25, I was the fortunate beneficiary of a trust from my grandfather Gardner’s estate, divvied up among each of his grandchildren. Having gotten married at age 24 without any official employment at the time — you can imagine the rehearsal-dinner toasts — I should probably have been more interested in this inheritance than I was. But if I recall correctly, I didn’t show a great deal of interest or attention when my father began presaging this event in occasional phone conversations…

…On the fateful day of the distribution, I made a trip to Lancaster with my dad to visit my uncle and sign documents transferring the investment portfolio. I cannot now remember the exact setting or particular circumstances. Sixteen years ago already seems like another era — it was pre-Internet, for one thing. But it was during this trip that I would be greeted with an image that has seared itself into my memory — and will now sear itself into yours as well, if I convey it to you properly.

I am not here to talk amounts, portfolio theory, or asset-allocation models (although if you’re interested, the portfolio was mostly in stocks, probably about 25 different positions).

I am not here to talk individual stocks. I can’t tell you definitively what many of the stocks were, but most were well-known or respected firms with strong long-term records…

…Expressed in easy-to-read black and white on a page or two of numbers was an astonishing demonstration of long-term investment success. Almost position by position, stocks that were trading for $30, $40, $50 a share on that day had been held for years and years, invested at cost bases of $1.57, $2.34, $0.88.

What I saw that day is what every young investor should see: Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment…

…And after finding good companies, boy, do you ever work a lot less than people making dozens of trades a week, following fast-talking TV gurus or somebody’s overpriced charting software.”

His secret… is no secret at all

When I first discovered the article by chance (I can’t even remember when that happened as it seemed such a long time ago), what David wrote got seared into my consciousness for his admonition on investing for the long-term was also something that’s endlessly echoed by some of the best investors the world has seen. Warren Buffett. Shelby Davis. Sir John Templeton. Peter Lynch. Charlie Munger. Philip Fisher. You name them; they’ve got “long-term” in them.

In fact, Philip Fisher and Shelby Davis often took things to the extreme in terms of longevity holdings… and often ended up with extreme positive returns. For instance, Fisher had held onto shares of Motorola for 21 years till his death in 2004 and managed to see the share appreciate by more than 20-fold. Davis, for his part, was found in the 1990s to still be holding onto his shares of a bunch of Japanese insurance companies that he had bought in the ‘60s. One such share, Tokio Marine & Fire, was bought in 1962 for US$641,000 – that stake had grown to US$33 million by 1992.

Despite all the examples that exist of how the greatest investors got rich through having patience and by investing for the long-tern, it’s fair to point out that they are predominantly Western ones. For Singaporeans, it might even be right to be sceptical that such an approach can even work here.

But just over the weekend, I got to hear of Singapore’s own version of David’s “The Greatest Secret of All.”

Singapore’s own secret

Last Saturday, I was having a wonderful dinner with a group of friends who really dig investing. During the course of our meal, one of them shared how he had stumbled upon the same kind of epiphany that David had when he saw his mother’s own investing results.

More than 36 year ago in 1978, my friend’s mom (let’s call her Mrs Lee) had bought S$1,800 worth of shares in what was then the Singapore Bus Service. In 1980, Mrs Lee bought another chunk of shares in the same company for S$2,000 and has held onto every share since then.

Over the years, through a series of corporate actions, early shareowners of Singapore Bus Service (like Mrs Lee) would have wound up with shares in both ComfortDelGro Corporation (SGX: C52) and SBS Transit (SGX: S61) if they had never sold.

And guess what? That S$3,800 investment Mrs Lee had made in 1978 and 1980 has today, grown to become S$42,300 (as of today, Mrs Lee owns 16,000 shares of ComfortDelGro and 1,200 shares of SBS Transit, all of which came from her initial investments in Singapore Bus Service). And, she got that 1,013% return all from simply “holding those positions tenaciously over time, as David puts it.

“Tenaciouslyis the right word to use here when describing how it can feel like for investors to hold onto their shares for the long-term. That’s because Singapore’s share market, like those from around the world, are by their nature, volatile beasts. They rise, and they fall (the latter, often gut-wrenchingly). But by and large, they rise… slowly and steadily over time as a nation’s wealth compounds.

The Straits Times Index (SGX: ^STI) provides a great picture of how that works out. Here’s what I had written previously on the topic:

“From 1988 to 2013, the Straits Times Index has declined by more than 20% from its peak to trough in each calendar year in 8 separate years. That’s volatility at its finest… But, what has happened to the index in those 25 years? It has climbed 280% – or 5.3% annually on average – from 834 points to 3,167 at the end of last year [2013].”

An additional point to add on about Mrs Lee’s investment experience has to do with income: Dividends from her Singapore Bus Service shares now also give a massive yield on her original investment cost basis. ComfortDelgro and SBS Transit paid dividends of S$0.07 per share and S$0.018 per share, respectively, for their last completed financial years. That works out to a total dividend of S$1,144 in 2013 and a yield on cost of 30% (S$1,144 divided by S$3,800).

Foolish Bottom-Line

In David’s article, he suggested that everyone scribble down the following and paste it on their fridge doors (I’d suggest you paste it onto your computer monitor too!) as it helps give investors some of the best odds for investing success:

“Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your original investment.”

That would have been a great ending note to this article – but I have to add that none of the above is meant to suggest that ComfortDelGro or SBS Transit are good companies that are guaranteed to do well in the future. Rather, they’re used as an example of how long-term investing can work out for investors even in Singapore; as Winston Churchill once said, “The farther backward you can look, the farther forward you are likely to see.

In addition, I couldn’t leave the final word to David as I also feel compelled to ask of you, my dear readers: Have you heard or seen your own versions of David’s greatest secret in the share market? Please share them with me in the comments section below!

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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 doesn’t own shares in any companies mentioned.