Pension plans may not be something Singaporeans are familiar with, but it?s simply a name used to describe a pool of funds. The contributors to this pool are a company?s employees and the fund is invested by the company to provide the capital for retirement benefits when said employees retire in the future.
Pension plans are also unfortunately a big headache for many American companies given that they are mostly underfunded in the country, though some improvements have been seen more recently. Yet, for one U.S.-based company called Graham Holdings, formerly known as the Washington Post, its pension plans…
Pension plans may not be something Singaporeans are familiar with, but it’s simply a name used to describe a pool of funds. The contributors to this pool are a company’s employees and the fund is invested by the company to provide the capital for retirement benefits when said employees retire in the future.
Pension plans are also unfortunately a big headache for many American companies given that they are mostly underfunded in the country, though some improvements have been seen more recently. Yet, for one U.S.-based company called Graham Holdings, formerly known as the Washington Post, its pension plans were a blessing.
In 2012, while the majority of corporate America were struggling with their pension plans as I already mentioned, Graham Holdings had a US$605 million surplus to what it needed. For its good fortune, the company can thank a man and his memo.
The man’s none other than the investing legend Warren Buffett, who had first invested in Graham Holdings’ stock back in 1973 and was a shareholder all the way till 2014. His memo was written in 1975 and had been publicly released only in 2013.
Buffett had addressed the memo to Katherine Graham, the then-leader of Graham Holdings, and discussed the issue of how pension plans should be managed. His favoured approach toward investing for pensions “involves treating portfolio management decisions much like business acquisition decisions by corporate managers.”
In so doing, “the results of the business become the standard against which measurements are made rather than quarterly stock prices.” It also “treats stock ownership as business ownership with the corresponding adjustment in mental set [emphasis mine].”
The itaclised-portion in the paragraph just above highlights the simple tweak in mindset that investors can change which can make a world of difference to their investing results: Instead of focusing on the performance of a stock’s price over the short-term and measuring success or failure based on that, think like a business owner and focus on the business’s long-term results instead.
Buffett wrote in his memo that his approach toward investing (emphasis mine) “rests on a belief, which both seems logical and which has been borne out historically in securities markets, that intrinsic business value is the eventual prime determinant of stock prices.”
Peter Lynch, another figure of immense repute in the investing world, once put this in a less-abstract manner in a 1994 speech:
“I’m trying to convince people there is a method. There are reasons for stocks to go up. This is very magic: it’s a very magic number, easy to remember. Coca-cola is earning 30 times per share what they did 32 years ago; the stock has gone up 30 fold. Bethlehem Steel is earning less than they did 30 years ago – the stock is half its price 30 years ago.
Stocks are not lottery tickets. There’s a company behind every stock – if the company does well, the stock does well. It’s not that complicated.”
Lynch’s sage words are repeated in the experience of many local stocks in Singapore too. Take for instance the sextet of Kingsmen Creatives Ltd (SGX: 5MZ), Hour Glass Ltd (SGX: AGS), Straco Corporation Ltd (SGX: S85), Huan Hsin Holdings Ltd (SGX: H16), Advance SCT Limited (SGX: 5FH), and Elektromotive Group Ltd (SGX: 5VU). You can see how the businesses and shares of the six companies have done over the past decade:
Source: S&P Capital IQ
As the table shows (click for larger image), there’s a clear relationship between a stock’s business performance and its subsequent price movement.
Tweaking our mindset to think like a business-owner when investing helps us focus on the thing that truly matters – the performance of the stock’s business.
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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 of Kingsmen Creatives and Straco Corporation.