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Doing This Can Destroy Your Investing

Investing based on broad macro-economic themes sound feasible.

The price of coal will rise? Great – let’s get us some coal producer stocks. India’s economy will experience supercharged growth in the future? Cool – let’s find us some stocks with huge exposure to a wide swath of India’s economy.

(Note: I’m not saying that coal prices will climb or that India’s economy will grow rapidly; they are just hypothetical situations.)

But, investing in such a manner can actually destroy your portfolio.

Cigarette consumption in the U.S. had hit 640 billion sticks in 1981 according to data from the U.S. Department of Agriculture’s Tobacco Outlook reports. The report was discontinued in 2007 but by then, cigarette consumption had already slumped by nearly half to 360 billion.

There are no official government statistics since then, but it’s very likely that the number of lighted sticks had continued to dwindle.

With its total addressable market shrinking by the day, one would expect U.S.-based cigarette maker Altria to be a horrible stock to own after it had spun-off its international operations on 28 March 2008.

Turns out, Altria’s shares had gained 144% in price since then, far outpacing the 50% return of the S&P 500 (a widely followed U.S. market index) over the same duration.

Now let’s change tack to a growing market. The price of gold in Australia had more than doubled from A$620 per ounce to A$1,550 per ounce over the nearly-decade-long period from 30 September 2005 to 15 September 2015. This represents annual growth of around 10%.

Over the same timeframe, Australian gold producers have been anything but winning investments. The S&P / ASX All Ordinaries Gold Index, an index comprising Australian gold mining stocks, had lost nearly 4% per year having fallen from 3,372 points to 2,245.

Investors who were scared off by a shrinking pool of smokers would have lost out on Altria. Meanwhile, those who were lured by rising gold prices in Australia would have been crushed by tumbling Australian gold miners.

These are good examples of how investing returns are – ultimately – governed by a stock’s long-term business performance (and to some extent, the valuation of the stock). To that point, Altria’s net income actually rose from US$3.02 billion in 2008 (excluding its international business) to US$5.06 billion in 2014.

In Singapore’s stock market, Yoma Strategic Holdings Ltd (SGX: Z59) can be an example of a company that’s nestled nicely in a powerful macro-economic trend. The company’s businesses largely resides in Myanmar and it has its fingers in many industries, including real estate, tourism, agriculture, and transport.

Meanwhile, Myanmar had opened up its economy to outside investors only in recent years and it has been experiencing a growing torrent of capital flowing into its markets. But even if Myanmar’s economy does grow at a rapid rate, there are no guarantees that Yoma Strategic will be a success story. There are many hoops that the company has to jump through to take advantage of the country’s potential ascend.

All told, there are many obstacles that stand between a growing macro-trend and a company’s business growth. These obstacles are things we as investors have to focus on.

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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 does not own any companies mentioned above.