How You Can Earn the Stock Market’s Best Returns

So, how can you achieve what I had mentioned in the title of this article? The Motley Fool’s co-founder David Gardner has some choice words on the matter:

“Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your investment.”

I had emphasized the word ‘tenaciously’ above because it is the key here. And, I’m going to show you just why that’s so using three of my favourite investing anecdotes and examples.

The first: Falling flat on TV

On 2 July 1998, David and Tom Gardner, who’s another co-founder of The Motley Fool, were invited to an American television programme called The View. In the show, David and Tom were asked to name an investment for the programme’s new host to buy and they happily obliged.

Six weeks later, the Gardners appeared on the The View again. This time though, they were roundly booed by the live audience at the programme’s recording. David even found out later from his friend, a long-time follower of The View, that no guest had ever been booed on The View prior to this.

Turns out, the Gardners’ recommended stock had fallen by a third in value in those six weeks. David and Tom urged their host to hold on for the long-term as they still believed in the strength of the business.

I never got to find out if the host of The View ever did follow the tip, but if she did, and had she held on since 2 July 1998, she’d be a very happy lady today. The stock in question is none other than the global coffee-chain behemoth Starbucks.

In 1998, Starbucks had less than 2,000 outlets and was mostly a domestic growth story in the U.S; today, it’s a bona fide global company with more than 23,000 stores in many different countries around the world. On 2 July 1998, Starbucks was worth a split-adjusted US$3.54 per share; today, the coffee powerhouse’s shares are at US$61.80 a pop.

What looked like a complete loser over the short-term turned out to be a world-class champion over the long-term.

The second: The best investment never known

Billionaire investor Warren Buffett has amassed plenty of huge long-term winners in his portfolio over the years. Some are very well-known investments while others are more obscure.

One that belongs to the latter category is actually among Buffett’s best-ever investments in terms of percentage gains: Washington Post (now known as Graham Holdings).

Buffett had first invested in Washington Post back in 1973. By 2007, his investment had grown in value by more than 12,000%! What was even less well-known however, is that Washington Post’s stock price had declined by 20% after Buffett had bought them and stayed depressed for three years.

The third: Painful stumbles along the way

When it comes to the local stock market’s best winners over the past decade, healthcare services outfit Raffles Medical Group Ltd (SGX: R01) would be in the mix.

Since the start of 2005, Raffles Medical’s shares have surged by 887%. This compares with the paltry 42% gain that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has experienced over the same period.

But for investors in Raffles Medical to earn the great long-term returns we had just discussed, they had to suffer some tremendous short-term pain.

Maximum drawdown for Raffles Medical Group, 2005 - 2014

Source: S&P Capital IQ

The chart above plots the maximum drawdown (largest peak-to-trough loss) that Raffles Medical’s stock price has suffered in each calendar year from 2005 to 2014. As you can see, the healthcare outfit’s stock had experienced a drawdown of at least 10% in 9 out of the 10 years under study.

A Fool’s take

What all the three examples above illustrate is that even the best long-term winners are not immune from massive short-term declines every now and then.

As investors, we have to develop the tenacity to sit through those trying periods and allow the great businesses we’re invested in to compound their value over time. That’s how you can earn the stock market’s best returns.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 Starbucks and Raffles Medical Group.