Forget About Predicting The Global Economy – Here’s A Better Way to Invest

bus sign

Let’s wind the clock back to August 2009.

Imagine yourself as an investor back then who was interested in the public transport industry. In Singapore’s share market, there were two sizeable companies in that space which might have caught your eye: ComfortDelGro Corporation Limited (SGX: C52) and SMRT Corporation Ltd. (SGX: S53).

One obtains half its earnings from foreign shores in places like Europe, where there was still a great amount of lingering fear regarding the fallout from the Global Financial Crisis which took place only two years earlier. Meanwhile, the other provides a necessary service – public transport in the form of buses and trains –  for the 5 million or so population living in Singapore. Both companies were also trading for around 15 times trailing earnings. Which would you choose?


Source: Google Finance – SMRT (ReD) Vs ComfortDelGro (Blue)

I compared the two companies above because what you ended up choosing in August 2009 would have a big impact on your investment result today. The chart above shows the investment returns from the two companies since August 2009. To recap, if we exclude dividends, ComfortDelGro was able to clock up a gain of about 56% for its shareholders while shareholders of SMRT would still be suffering a 5% loss.

The value of economic predictions

In the past five years since August 2009, there have been numerous economic forecasts and warnings on the European Union breaking up; a slowdown in China; and the end of a super cycle of economic growth for Australia. These are all regions in which ComfortDelGro has sizeable businesses in.

In contrast to these troubled areas of the world economy, Singapore has been a bastion since the end of the Global Financial Crisis. In fact, economic forecasts for our nation have been relatively benign, even optimistic at times. It should have been great news for SMRT, which conducts business almost exclusively in Singapore.

If an investor had invested according to forecasts, the obvious candidate for his or her investment dollars would have been SMRT. Yet, as we saw in the chart, it was ComfortDelGro which came out tops.

This for me, is an apt microcosm of the value – or rather, lack of value – which economic predictions bring to the process of making a sound investment decision. Even if the big picture prediction comes true – which is very tough to accomplish – granular events might still play out very differently. We saw that with SMRT and Singapore; the healthy state of our nation’s economy did nothing for the company.

Focus on the performance of the company

Interestingly, an investor who focused on the results of the individual companies might have made better choices in those five years between August 2009 and today. For instance, SMRT had been unable to grow its earnings from 2009 to 2011 – it even saw a sharp drop in profit in 2012. ComfortDelGro on the other hand managed to grow its earnings comfortably but slowly throughout those five years.

It should also be noted that both shares had generated similar returns up till 2012, the year when SMRT’s problems started surfacing. At that point, investors should have been able to have a clearer picture on the challenges SMRT were facing and see that ComfortDelGro clearly had better corporate performance.

Foolish Summary

This little example shows us that as investors in individual companies, we should be spending our energy on understanding the challenges and operations of the companies’ business instead of fretting about what the global economy would be like over the short term. In short, focusing on the business itself might be way more valuable than predicting the future of the economy.

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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 contributor Stanley Lim doesn't own any shares of companies mention above.