A Horrible Way To Invest

I think one of the worst ways to invest is this: “I’m buying company ABC’s stock for the next 12 months because its earnings will balloon in that period.”

Why? That’s because there’s simply no telling what stock prices can do over the short-term. We can take our cues from the experience of both Straco Corporation Ltd (SGX: S85) and Raffles Medical Group Ltd (SGX: BSL). The two companies have been big long-term winners in Singapore’s stock market. From the start of 2005 to today, Straco has seen its share price climb by 430%; over the same period, Raffles Medical’s share price has gained some 921%.

You can see in the table below how the two companies’ earnings and share prices have changed in each year from 2005 to 2016:

Straco and Raffles Medical share price and EPS change table
Source: S&P Global Market Intelligence

What the table shows is how erratic the two companies’ earnings and share price changes can be from year to year.

Let’s look at a few instances with Straco first. In 2007, the company’s shares gained 54%, mostly in line with its 61% jump in profit. But in 2008, a 32% increase in its earnings was met with a 51% decline in its share price. In 2010, despite enjoying an 85% spike in earnings, Straco’s shares ended the year with a meagre gain of just 3.8%

Then, we have Raffles Medical Group. 2007 was a good year for the company, as its earnings and share price both displayed strong growth of 71.2% and 104.1% respectively. 2008 was a different story though. A relatively small 12.2% dip in earnings was accompanied by a massive 54.3% fall in the share price. 2011 was a year in which Raffles Medical enjoyed a 13.9% increase in earnings; its share price reciprocated with an 11.3% stumble.

There’s a classic saying in the investing world widely attributed to Benjamin Graham that goes like this: The stock market is a voting machine in the short run but a weighing machine in the long run.

From 2005 to today, Straco and Raffles Medical saw their earnings per share climb by 3,359% and 450%, respectively. The strong earnings growth from the duo have powered their share prices higher over the same period. But over the short-term, an impressive business performance from the pair could just as easily result in mediocre share price returns (or losses) as solid price gains.

The experience of companies such as Straco and Raffles Medical serve to illustrate why banking on short-term earnings growth for short-term gains can be a horrible way to invest. Stick with a great business for the long-term – that’s how you can increase your chances of being well-rewarded over time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group. Motley Fool Singapore writer Chong Ser Jing owns shares in Straco Corporation and Raffles Medical Group.