Yesterday, I wrote an article on four surprising things about the investing world that every investor should know. They come from my experience after I’ve spent over three years as a writer and analyst with the Motley Fool Singapore and more than a decade learning about investing. As I thought about the article, more of these surprising things started percolating in my mind. Here are the fifth, sixth, and seventh. 5. An investor can still make a nice return even if he invests in the shares of a company and it goes bust. During the Great Financial Crisis of…
Yesterday, I wrote an article on four surprising things about the investing world that every investor should know. They come from my experience after I’ve spent over three years as a writer and analyst with the Motley Fool Singapore and more than a decade learning about investing.
As I thought about the article, more of these surprising things started percolating in my mind. Here are the fifth, sixth, and seventh.
5. An investor can still make a nice return even if he invests in the shares of a company and it goes bust.
During the Great Financial Crisis of 2007-09, my colleague Morgan Housel had made an investing mistake. He explains (emphasis mine):
“The housing market was crumbling, and a smart value investor I idolized began purchasing shares in a small, battered specialty lender. I didn’t know anything about the company, but I followed him anyway, buying shares myself. It became my largest holding — which was unfortunate when the company went bankrupt less than a year later.
Only later did I learn the full story. As part of his investment, the guru I followed also controlled a large portion of the company’s debt and and preferred stock, purchased at special terms that effectively gave him control over its assets when it went out of business. The company’s stock also made up one-fifth the weighting in his portfolio as it did in mine. I lost everything. He made a decent investment.”
As Morgan’s example showed, we may never be able to know what any investor’s true motives are for making a particular investment. And for that reason, it may pay to never follow anyone blindly into the stock market.
6. A commodity producer’s stock can be a sickening investment even if the price of its commodity actually grows.
Gold is a neat example. The shiny yellow metal was worth A$620 per ounce at the end of September 2005. Nearly 10 years later, on 15 September 2015, the price of gold had climbed by 10% per year to A$1,550 per ounce. Unfortunately, the S&P / ASX All Ordinaries Gold Index, a stock market index for Australian gold mining stocks, had fallen by 4% per year on average from 3,372 points to 2,245 in that timeframe.
At the moment, oil-related stocks may be on the radar of bargain hunters given that many of them have fallen hard with the precipitous decline in the price of oil from over US$100 per barrel in mid-2014 to around US$35 today. To the point, the 54 oil & gas stocks there were listed in Singapore as of November 2014 had seen their shares fall by 45% on average from the start of 2015 to yesterday.
Some that have been hit particularly hard include Swiber Holdings Limited (SGX: BGK), REX International Holding Ltd (SGX: 5WH), and Nam Cheong Ltd (SGX: N4E); their shares had plunged by at least 62% over the same period.
It may be tempting to think that oil & gas stocks in Singapore can rise in tandem with oil should the commodity’s price start to climb. But for investors who are interested in oil & gas stocks here as a play on the possibility of oil prices rising, please think twice, keeping the experience of the Australian gold miners in mind.
7. In an era dominated by the rise of computers, companies producing boring and mundane products can be better investments than companies dealing with computers.
As a case in point, I’d turn to some excerpts from an old piece by Morgan:
“Measured by the number of PCs [personal computers] added annually, computer growth really took off in the mid-1990s as the Internet became mainstream. There are about 800 million more PCs worldwide today [referring to June 2012] than there were in 1995. One of the biggest winners from this explosion should have been Microsoft, whose operating system the majority of those computers run on. Indeed, Microsoft’s profits have grown 16-fold since 1995.
Yet once again, the best stock returns may surprise you. With dividends, Microsoft has returned 511% since mid-year 1995. But Clorox returned 560% during that time – so bleach actually bested the last leg of the computer revolution. Colgate-Palmolive returned 651% over the same period, so toothpaste did, too. As did garlic powder: McCormick returned 642%. Ditto for hamburgers, with McDonald’s adding a 540% gain. Hormel Foods produced a 544% gain over the same period, so Spam was actually more profitable than computers during the big boom. [Cigarette maker] Altria scored a 1,300% gain, nearly trebling Microsoft’s return.”
From the above, I trust it’s obvious to see that there’s more to investing than just thinking about growing trends in society.
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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 doesn't own shares in any companies mentioned.