Good fundamental stocks always give steady returns

Wednesday January 14, 2009
Good fundamental stocks always give steady returns

IN a stock market, there is a small group of investors who seem to have the wrong mindset on long-term investment.

To them, long-term investment via the “buy and hold” strategy cannot give higher returns than short-term trading.

They feel that even though the former may provide higher returns, they need to wait for a long time before they can enjoy the good returns.

According to Peter L. Bernstein in his article The 60/40 Solution: “In investing, tortoises tend to win far more often than hares over the turns of the market cycle ... placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.”

Good fundamental stocks always give good and steady returns over the long term.

However, investors need to hold them for long term.

Besides giving higher returns, investors will also face lower risks when they invest in these good fundamental stocks compared with speculative stocks.

In this article, we will look at the performance of Warren Buffett’s investment company, Berkshire Hathaway Inc versus the performance of S&P 500.

The table summarises the historical performance for Berkshire versus the S&P 500 from 1965 to 2007 (a total 43 years) based on the latest available 2007 annual report.

Based on the annual report, the yearly compounded gain for Berkshire was 21.1%, which outperformed the 10.3% returns generated from S&P 500 over the same period.

In general, in most periods, the returns from Berkshire were higher than those from the S&P 500. However, we need to understand that Buffett did not generate 21.1% every year.

There were 23 years in which his returns were lower than 20% (we used the nearest 20% as the benchmark).

Nevertheless, during the bull markets, Berkshire was able to generate annual returns of 40% to 60% for five years whereas there was not a single year in which S&P 500 charted above 40% returns per annum.

In terms of losses, Berkshire only reported one year of negative return versus S&P 500, which has 10 years of negative returns.

To quote one of Buffett’s most important investment principles: “If you want to win, you don’t lose.”

To Buffett, as long as you can reduce the losses incurred in the bear market and increase the percentage of high returns during the bull market, your performance should be higher than the overall market performance.

In short, we cannot expect to generate high returns every year. We have to accept that there will be certain years we need to protect our capital from incurring losses rather than thinking of how to generate high returns.

Almost all investment gurus or analysts say that 2009 will be a tough year. As long as we can avoid incurring losses and have the patience to wait for the next bull market, we should be able to outperform the overall market over the long term.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2009/1/14/business/3013544&sec=business

Comment: I agree. :)