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How To Look For Investing Gems In Quiet Markets

It has not exactly been a barrel of laughs on the Singapore market this year. Or has it?

At the start of the year, the Straits Times Index opened at 3,174 points. Some investors had probably hoped that the benchmark would punch well above 3,300 before the year was out.

Surely, that would not have been too much to ask for, would it? After all, it would only have represented a growth of about 4%.

But at it stood, the index had barely moved the needle by the end of the third quarter. At the end of September, the Straits Times Index (SGX: ^STI) was  an uninspiring 3,276 points, which is a gain of just 3%. It would probably have been more enjoyable watching paint dry.

But the paint dried quickly. Between the end of September and today, the Singapore market had gained another 2%. It just goes to show that you can’t ever time the market.

But here is something else to think about. Tucked behind the headline numbers were 30 separate companies that enjoyed varying degrees of fortune over the first nine months. No fewer than 13 had outperformed the index, while 17 were left trailing in the index’s wake.

Those that did extraordinarily well included Thai Beverage Public Company (SGX: Y92) and Olam International (SGX: O32). Can you believe it? Olam International, which was in the doghouse last year, had not only recovered fully but it could even be a serious contender for this year’s star blue-chip stock.

Meanwhile, one of last year’s strong performers turned turtle. SIA Engineering (SGX: S59), which rose 15% last year, slumped 8% in the first nine months of this year. Elsewhere, Sembcorp Marine (SGX: S51), which beat the market with a 3% gain in 2013, had lost 15% of its value over the nine months.

At this juncture, we could examine the benefits of swing trading and look at how we could have magnified the gains through sophisticated trading instruments. But we at the Motley Fool know better than that.

We are long-term investors, which mean that we do not believe in timing the market. Instead, we aim to look for good companies that can deliver solid returns over the long haul.

A company such as Sembcorp Marine, for instance, has delivered a total annual return of 10% since the start of the Millennium. In other words, an investment in the shipbuilder has quadrupled over the last 14 years.

How, you may ask, has Sembcorp Marine done this? The answer can be found in its consistently-high Return on Equity, otherwise known as the RoE.

The RoE consists of two parts. The “R” or “Return” is the Net Profit that a company generates from its operations. The smarter the operator, the smarter could be its bottom-line profits.

The “E”, or of the “Equity” part of the ratio, is the stake that we as shareholders have in the business. When we buy shares in a company, we own a small part of the company. So we benefit from the returns that the company makes. In other words, the better the returns, the better could be the share-price performance.

Peter Lynch once observed: “Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock.”

Lynch qualified his comments with the following sage words: “This disparity is the key to making money; it pays to be patient, and to own successful companies.

Making money in the stock market is not rocket science. It is about looking for good companies and waiting for a fair price, as Warren Buffett remarked a long time ago.

Problem is fair prices don’t often happen when stock markets are on the rise but, instead, when markets fall. When that happens, though, there can be a tendency to wait and hope for an even fairer price. That is when investing turns into speculation.

So, think about what an asset is capable of producing and not about the daily valuation. If you focus on the former you are an investor. If you focus on the latter you are a speculator.

A version of this article first appeared in a SIAS newsletter.

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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.