What You’ll Need To Endure To Enjoy The Stock Market’s Best Gains

Stock market crashes are as common as night follows day.

Going back to the 1920s, the S&P 500 in the U.S. (a broad market index akin to the Straits Times Index (SGX: ^STI) here in Singapore) has on average, crashed by 20% or more once every four years.

But yet each time this happens, investors start panicking and worry that there’s something broken in the stock market or the broader economy.

Thing is, having the ability to endure short-term price declines in our stock holdings is what sets the stage for us to be able to enjoy the market’s best long-term gains.

Buffett’s folly

Warren Buffett’s arguably the greatest investor of our generation. But when he bought one of his best investments ever in the Washington Post back in 1973, he had to suffer through at least one-and-a-half years of double-digit losses before seeing his investment jump more than 10,000% by 2007.

Here’s him describing that particular experience in his 1985 Berkshire Hathaway annual shareholder letter:

“We bought all of our WPC [Washington Post] holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise…

… Through 1973 and 1974, WPC continued to do fine as a business, and intrinsic value grew. Nevertheless, by yearend 1974, our WPC holding showed a loss of about 25%, with market value at [US]$8 million against our cost of [US]$10.6 million. What we had thought was ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value.”

As Buffett showed, earning superior long-term gains does not necessarily mean that investors have to avoid short-term crashes – this applies to Singapore too.

The local exemplars

Vehicle inspection outfit Vicom Limited (SGX: V01) got listed in October 1995 and had closed at S$0.87 on its first trading day according to S&P Capital IQ. Early investors were more than a tad unfortunate though as shares fell to as low as S$0.30 (that’s a painful 66% haircut!) three years later on October 1998.

But today, Vicom’s at S$6.54 per share, up 650% from S$0.87. Investors who had held on since October 1995 would have been able to reap the rewards.

It’s really the same with many great long-term winners in Singapore’s stock market – their stupendous long-term gains have come with extremely chaotic short-term losses and volatility in between.

We can take Raffles Medical Group Ltd (SGX: R01) as another example.

The healthcare provider closed its first trading day at S$0.47 on April 1997. By August 1998, Raffles Medical had fallen to S$0.36; the slide continued and the company’s shares finally bottomed-out at S$0.24 on February 2003, some 50% lower than on its first trading day.

But today, the healthcare provider’s shares are exchanging hands at nearly S$4 a pop – that’s some 750% higher than where it was back in April 1997.

A Fool’s take

When it comes to investing in great companies, patience is often what’s needed. Even the best long-term winners that are bought at stupendously cheap prices are not immune from stomach-churning price declines over the short-term, as Buffett’s experience showed.

So, the next time you see your stocks fall in price by 20%, 30%, or more (and it’s likely they will someday, we just don’t know when!), check back on their business performance. If they have a healthy business but falling stock price, then remember Buffett’s story with the Washington Post.

Be patient.

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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 writer Chong Ser Jing owns shares in Berkshire Hathaway, Vicom, and Raffles Medical Group.