The Small Investor’s Secret to Beating the Global Financial Crisis

A new milestone was passed last night, and it was one which has been more than five and a half years in the making. The S&P 500, a broad share market index in the USA, briefly went past the 2,000 mark. This has been a remarkable turnaround from the index’s lows in 9 March 2009; since then, the index has risen by almost three times.

But lest we forget, things were not always that rosy.

Investors who have been around for a while may remember that the Global Financial Crisis for the US share market began on 11 October 2007. Back then, the S&P 500 hit an intraday high of 1,576 before declining 57.3% to its intraday low of 673 in Mar 2009. Despite making history just yesterday, the S&P 500 has in fact, barely returned 3.45% annually from its 2007 high.

The petrified share market participant

With comparable numbers like these, the petrified share market participant may be compelled to try his hand in waiting for the next recession in order to achieve better returns.

After all, when we look back, the low of 9 March 2009 must have seen like a great time to buy shares. That is when Singapore-listed companies such as M1 Ltd (SGX: B2F) and Keppel Corporation Limited (SGX: BN4) were trading at $1.49 and $3.71 respectively. At those prices back then, they were valued at just 9 times and 6 times trailing earnings respectively. Today, M1’s more than doubled to S$3.75 and carries a trailing price/earnings ratio of 21. Similarly, Keppel Corporation is up manifold to S$10.98 with a trailing PE of 11.

So, with the numbers seemingly on the side of market downturns, what is a long-term investor to do? Or, more specifically, as we pass new highs, what is the Foolish long-term investor to do?

Beating the Great Recession

To continue, I would like to defer to three of my oldest holdings in my own portfolio. The trio would be the American shares, Buffalo Wild Wings, Chipotle Mexican Grill, Inc, and Netflix, Inc. The reason why the group was chosen was primarily because all three were bought in 2007, a year of market highs.

Without further ado, the tabulated returns are shown below.

Company Date Purchased Cost basis Closing Price (Aug 25, 2014) Returns to date
Buffalo Wild Wings 10 September2007 and 4 January 2008 US$23.28 US$144.30 520%
Chipotle Mexican Grill 7 February 2007 US$57.38 US$676.95 1,080%
Netflix 12 January 2007 US$22.99 US$479.19 1,984%
Note: Chipotle Mexican Grill traded as a B-share when it was bought; cost price for Buffalo Wild Wing is on an average basis.

The sharing of my returns comes with the hope that it inspires Foolish readers out there to consider lengthening their time horizons for the chance of achieving better rewards further down the road. The purpose here is not to talk about individual shares, complicated math, or any grand portfolio theories.

Because, the truth turned out to be much simpler. If there was a secret to beating the Global Financial Crisis, it would be this:

Buy great companies and hold them for the long-term.

My role as an investor was to simply step aside and let great business leaders run the show.

When that happens, my experience informs me that changes in the highs and lows of any share market index may not matter as much as the choice of a great company with a matching long-term horizon.

I would argue that when the small investor lengthens his or her investing time horizon, it allows great managers of great businesses the appropriate years to make a real difference. David Gardner, co-founder of The Motley Fool, puts this message more eloquently:

“Finding good companies and holding those positions tenaciously over time can yield multiples upon multiples of your original investment. That’s what great investors do. Warren Buffett has done it with classic American brands Coca-Cola and American Express; Philip Fisher did it with Motorola and Texas Instruments; Shelby Davis did it with American International Group.”

The further good news is that looking for good or even great companies is the same thing which the Foolish investor should be doing day in and day out. This comes regardless of whether we are looking at the bargains of a market downturn or as we pass new market highs as we have seen the day before.

Foolish bottom line

In conclusion, I would like to like to leave you with the words of another Motley Fool co-founder (and now CEO), Tom Gardner. Tom first wrote these words more than seven years ago, but I believe that the wisdom in it still rings true today, as it did back then:

My approach is to check my stocks every day. But I do so from the standpoint of a lifelong investor — literally, right up until they carve my plot in the churchyard.

With that perspective, I find myself always on the lookout to LEARN more now so that I might EARN more later. Stocks down for the day, week, month or year … well, what can I learn from that?

When all is said and done, none of us will remember how our money did on any given day. We’ll even have trouble remembering our performance in any given year. But from saving methodically and investing avidly, the odds are very high we’ll have increasing levels of financial independence such that we can live our days freely as we choose. With a tip of the Fool Cap to Milty Friedman, being free to choose our days is a noble aim.

I watch my stocks like a sports fan, watch the leaders at our companies like an owner, and watch our portfolio performance like a patient banker. The power of compounding, I submit, will make a pleasing mockery of your daily stock-price concerns.

Foolish best to you as your portfolio grows, stagnates, shrinks, and ultimately grows exponentially.

Stick around, as I explore even more advantages of being a small individual investor. And, if you're really eager to learn more about investing and to keep up to date on the latest financial and stock news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore.

Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can grow your wealth in the years ahead.

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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 Chin Hui Leong owns shares in Buffalo Wild Wings, Chipotle Mexican Grill, Inc and Netflix, Inc.