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Would You Like A 20% Annual Return?

The Motley FoolWe regular bus riders can be a strange lot, sometimes. If you want proof, just take a good look around the next time you hop on board a bus in Singapore.

For instance, we have the “aisle-hoggers”. These are the people who – once they secure an aisle seat on the bus – will steadfastly refuse to budge. It seems that the simple act of shifting over to the seat by the window – to let another passenger sit down more easily – is almost as painful as having teeth pulled.

Next, we have the “exit-hoggers”. These commuters can be almost as exasperating as the aisle-hoggers. They spend most of the bus journey milling around the exit door, even if they don’t intend to disembark for some time. Until they do get off the bus though, they make it awkward for anyone else to alight easily.

Why do people do this?

Quite frankly I have no idea. It is almost as though they are terrified that they might not be able to get off the bus when they want. But to my knowledge, no one has ever been held against their will on a Singapore bus.

Leave when you want

Something similar goes on in the stock market. It seems that no sooner has someone bought a stock than they are already planning an exit strategy. They are already looking at how to dump the stock they have only just purchased.

Taking profit, it has to be said, can never be a bad thing. After all, no one ever went broke by taking a profit. But simply selling a stock because we have made a quick buck misses the point behind investing, altogether.

For instance, did you know that no fewer than eight constituents of the Straits Times Index (SGX: ^STI) have delivered total returns in excess of 20% a year over the last decade? These include casino operator Genting Singapore (SGX: G13), Singapore Exchange (SGX: S68) and industrial conglomerate Sembcorp Industries (SGX: U96).

A 20% return means than an investment in any one of the eight companies in 2004 would have sextupled over ten years. Or to put it in even simper terms, a $5,000 investment would have turned into $30,000 after just ten years, if you had bought, held and reinvested the dividends.

Trebling our money

Apart from the eight six-baggers, a further ten companies have delivered returns in excess of 10% a year over the last decade. These include commodities trader Noble Group (SGX: N21), aero engineer SIA Engineering (SGX: S59) and telecom behemoth Singapore Telecoms (SGX: Z74).

An annual return of 10% over ten years means that an investment in any one of the eight companies would have almost trebled, provided the dividends were regularly reinvested into more shares.

So here’s the thing: If we had invested equal amounts in the 18 companies, then our average return over the ten years would have been around 19% per year.

The best performer of the bunch has been Jardine Cycle & Carriage (SGX: C07), which delivered a total return of 26%. The laggard was Oversea-Chinese Banking Corporation (SGX: O39). It returned 10%.

Doing nothing

Some of you might be wondering how it can be possible to achieve extraordinary returns by doing nothing other than buying and then sitting patiently on our hands.

A clue was provided by Warren Buffett when he said: “It is not necessary to do extraordinary things to get extraordinary results”.

It is, therefore, not necessary to trade incessantly to achieve market-beating returns. In fact, Buffett provided a further clue when he said: “Buy so well that you don’t have to sell”.

The secret to achieving extraordinary returns is, therefore, to identify and buy shares in good companies. The second is to not become too fixated on the price that you have paid for the stock. The third is to resist grabbing a quick profit.

Sometimes, doing nothing after you have bought a stock can be harder than it might seem. But successful investors have learnt that doing nothing can be a good way to boost returns by cutting transaction costs and allowing the power of compounding to work its magic.

So, buy stocks as I would travel by bus. Tap in, find a seat by the window and enjoy the ride while the stock market “fun bus” delivers those total returns as you make your way to your destination.

This article first appeared in Take Stock Singapore.

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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 Director David Kuo doesn’t own shares in any companies mentioned.