1 Simple Formula for Investing Success

There’s a quote I like a lot that’s often attributed to the great scientist, Albert Einstein. It reads: “Everything should be made as simple as possible, but no simpler.” I believe it holds true for investing too.

So, this article is my attempt to throw forth a simple formula for investing success. But before we get to it, I have three graphs which together showcase an important point that’s related to the formula.

The first is a price chart of a real Singapore-listed company, illustrating how its shares have climbed from S$0.50 to more than S$1.50 over a two year period. Would you be happy to buy shares at the red circle?

Graph 1 (Raffles Medical Group)

Source: S&P Capital IQ

Now, take a look at the second graph, which is the price chart of the same company over the following year. It looks ugly. Anyone who bought at the red circle in Graph 1 would be down by 56% at the end of Graph 2.

Graph 2 (Raffles Medical Grouup)

Source: S&P Capital IQ

But let’s now zoom out and take a longer view. Graph 1 plotted the stock price of our Singapore-listed company from November 2005 to November 2007; for Graph 2, the period charted stretched from November 2007 to November 2008. Graph 3, which is just below, shows how our company’s stock has performed from November 2005 to today.

Graph 3 (Raffles Medical Grouup)

Source: S&P Capital IQ

The green circle in Graph 3 corresponds to the same period as the red circle in Graph 1. And guess what? Despite suffering that deep dive in November 2008, our company in question – healthcare services outfit Raffles Medical Group Ltd (SGX: R01) – has today returned 280% since November 2007. All told, the company’s shares have climbed by more than eight-fold from S$0.50 in November 2005 to S$4.24 today.

Raffles Medical was earning S$0.027 per share in profit in November 2005. By November 2008, it was raking in a profit of S$0.058 per share. Today, its earnings on a per share basis have ballooned to S$0.121. Tracing the healthcare provider’s business and share price performance over time helps illustrate the simple investing formula I mentioned at the start of the article:

Investing Success = Great Company + Time

Peter Lynch, the legendary investor who achieved a stupendous 29% annualised return over 13 years from 1977 to 1990 with the Fidelity Magellan Fund, wrote the following in his book Beating the Street:

“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. The disparity is the key to making money; it pays to be patient, and to own successful companies [emphasis mine].

Those sage words from Lynch, when boiled down to its core – or to be made as simple as possible, in the spirt of Einstein’s quote – reduces to the simple formula you see above. Investing success equals to ‘great company’ plus ‘time.’

For more insights on investing 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.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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 Raffles Medical Group.