The Best Analogy to Describe Investing

I have a large group of friends who really dig investing. Some of them are professionals in the industry while others treat investing as a serious hobby. But nearly all of them do not know who Ralph Wanger is.

Which is a shame, really, as Wanger’s an investor with a phenomenal track record. He became the manager of the Acorn Fund in June 1970 and by June 1997, he had led the fund to annualised returns of 16.7%, a full three percentage points higher than the return produced by the S&P 500, the US market’s benchmark.

His book – A Zebra in Lion Country – is hard to get hold of and an investing book I would really love to read one day. But in any case, Wanger had once shared an analogy for investing that I think is the best I’ve ever come across. He said:

“[There’s] an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum.

At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour.

What is astonishing is that almost all of the [dog watchers], big and small, seem to have their eye on the dog, and not the owner.”

To bring it back to investing, it is a stock’s business (the owner) which guides its price (the dog) over the long-term. But for some reason I can’t quite fathom, most stock market participants (the dog watchers) are watching only the short-term ticks of the stock’s price (the dog’s movements that are all over the place).

Just to illustrate how important a stock’s business results are to its long-term price movement, consider the cases of Raffles Medical Group Ltd (SGX: R01) and Creative Technology Ltd (SGX: C76). Here’s a table showing the changes in their earnings and stock prices since 2000:

Raffles Medical and Creative Technology stock price and earnings table
Source: S&P Global Market Intelligence

Creative Technology, with the decimation of its earnings, has seen its stock price shrink painfully over the years. Raffles Medical’s stock, on the other hand, has surged by over six-fold on the back of much higher earnings.

When you invest, pay more attention to a business’s long-term developments rather than its short-term price movements. At the end of the day, it’s the business that matters – the dog has no say but to follow its owner.

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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 Raffles Medical Group.