Here’s a small experiment: ask any sales person you know if they can increase their sales quota by 100% in the next year, and again the year after that. Now, I don’t know what the exact answer will be, but I’m going to guess that this sales person will be wondering why on earth you are asking this question. While the most would agree that increasing sales by 100% for two years in a row is an extremely difficult endeavour, this ready agreement contrives to fade away when it comes to investing. The strange thing is that some share market…
Here’s a small experiment: ask any sales person you know if they can increase their sales quota by 100% in the next year, and again the year after that. Now, I don’t know what the exact answer will be, but I’m going to guess that this sales person will be wondering why on earth you are asking this question.
While the most would agree that increasing sales by 100% for two years in a row is an extremely difficult endeavour, this ready agreement contrives to fade away when it comes to investing. The strange thing is that some share market participants often expect to get magnificent returns over very narrow timeframes.
How multi-bagging returns happen
So here’s the truth. The truth is that 100% growth in revenue or earnings-per-share (EPS) in a company may take years to come to light. Take VICOM Limited (SGX:V01) for instance. Below are the changes of its revenue and earnings per share over the last ten years.
(in S$ million)
|Year-on-year revenue growth||EPS||Year-on-year EPS growth|
Source: S&P Capital IQ
In this case, VICOM took four years from the financial year ended 2004 (FY 2004) to increase its EPS from around 9 Singapore cents to approximately 19 Singapore cents in the financial year ended 2008 (FY2008). The same applies for its revenue where it took seven years before its revenue doubled (from FY2004).
The power of compounding
Although the individual year-on-year growth in revenue seemed to come at unspectacular drips of high-single or mid-teen percentages, the compounded effect added up to a more spectacular 133% growth over the past ten financial years. The EPS did even better, with the compounding effect propelling it to grow by 256% over the last ten years. This was achieved, in part due to the net income margin improving from 17% in FY 2004, to 27.1% in FY 2013.
The underlying growth in revenue has, in turn, played a large part in the share price increase over the past ten financial years. In the table below, I have captured the closing price of the last trading day of each financial year.
|Share price||Year-on-year share price growth||Compounding effect|
Source: Google Finance
While there has been a negative returns in share price for two of the financial years, the long term share price returns eventually followed the strength of its revenue and EPS growth. In this case, the share price alone (without dividends) leapt by more than 410% in ten years. By any count, that would have been a spectacular return for patient long term investors.
Foolish bottom line
The bottom line is this: multi-bagging returns take time, just like it takes time to double a company’s revenue or profits over time. If the share price of a company is ultimately dependent on the underlying value, it follows that Foolish investors should endeavour to hold their companies for as long as that underlying value continues to grow to multi-bagging returns.
Although not every long term holding may turn out to be as profitable as VICOM has been, Foolish investors may be best served when they move towards holding for the long term. After all, it might just be the best shot you can take in your quest for multi-bagging returns. In ending, I would leave you with a quote from ice hockey legend, Wayne Gretzky when it comes to taking a shot at goal:
‘You Miss 100% Of The Shots You Don’t Take.’
The question is, will you take that shot for the long term?
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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 doesn’t own shares in any companies mentioned.