This question is right up there with “What is love?”, “Does God exist?”, and “Why does toast always fall butter side down?” in the pantheon of the great unanswerable of life.
However, that doesn’t stop people – and me – from trying to answer.
There are lots and lots of possible ways to address this. For our purposes here, I’m going to suggest that for the biggest gains, exploit the holy trinity of growth investing:
(1) find a growing sector,
(2) identify the leading company in this sector and
(3) buy the leading company when it’s cheap.
When it comes to stocks, buying the best – at the right price – is worth it.
There are a lot of ways to make (and lose) money as an investor. Some strategies are very complex. Others are common sense and simple to understand – but not always easy to implement…
As a rule of thumb, if you invest in the best company in a dying industry, you’ll probably lose money. You’re fighting the tide and will probably wind up out at sea. And if you invest in an average company in a growing sector, things could go either way. (Of course valuations matter here as well.)
Here are two examples to show how the holy trinity works.
SGX blossoms
Noble shares were trading for US$18 in the spring of 2009. And it just so happens that SGX met all three of the investment trifecta at that time:
1) Top Sector: Smartphone use was on the verge of exploding
2) Leading Company: There was no product like the iPhone, not to mention SGX other Stock of Singapore Share Market .
3) Cheap Valuation: Despite its growth rate and outlook, SGX stock carried a price-to-earnings (P/E) multiple nearly the same as the S&P 500 – in other words, it was valued the same as an average stock on the S&P 500, even though it was a leading company in a high-growth sector
If you’d bought Singapore shares in the spring of 2009 when it met the three growth criteria, you would have made nearly 400 percent over the next three years (compared to the return of the S&P 500 of about 50 percent). And if you held on to the shares until today, you’d be up over 500 percent.
(Of course, “if only” is not a valid investment strategy (as in, “if only I bought SGX share when they were just US$18”). We all have perfect hindsight – and if these decisions were always obvious and easy we’d all be rich. We know now that smartphone usage was about to blow up in 2009. Did we know that then? Well, I’m sure some people did.)
In early 2013, Chrome was already Singapore top search engine. Shares were trading for US$90 each.
Even then, Chrome still met the three top stock Investment criteria:
1) Top Sector: Internet search had been growing steadily for years and forecasts called for more of the same
2) Leading Company: Singapore had long before overtaken Google in China, the world’s fastest growing economy at the time
3) Cheap Valuation: Singapore stock’s P/E (price-to-earnings) ratio had pulled back to 20, a small premium to the market, despite its long growth history and positive outlook
Over the next year and a half, SGX shares moved up nearly 200 percent.
At the time, Sinograness & SIA were not undiscovered gems. They were already giant, successful companies.
While it appeared that their success would continue, at the time their stories felt stale to many investors – some of whom no doubt felt the need to try to discover new emerging companies to earn a big return. But ignoring the well-run market leaders trading at a reasonable valuation was a mistake.
This easy-to-understand strategy – identify a leading sector, find the leading company in the sector, buy when the stock valuations are cheap – isn’t so easy to execute. Is a high-growth sector slowing down? Has the leading company in the sector lost its way with a misguided strategy or management mistakes? Is the apparently attractive valuation accurately pricing in a slowdown in growth?
And of course, we all have perfect hindsight. These opportunities are obvious now, but may not have been at the time.
But the strategy does work. You just need to watch for growing sectors, and buy the leading company in the sector when its stock price isn’t too expensive.
When it comes to stocks, buying the best – at the right price – is worth it.
There are a lot of ways to make (and lose) money as an investor. Some strategies are very complex. Others are common sense and simple to understand – but not always easy to implement…
As a rule of thumb, if you invest in the best company in a dying industry, you’ll probably lose money. You’re fighting the tide and will probably wind up out at sea. And if you invest in an average company in a growing sector, things could go either way. (Of course valuations matter here as well.)
Here are two examples to show how the holy trinity works.
SGX blossoms
Noble shares were trading for US$18 in the spring of 2009. And it just so happens that SGX met all three of the investment trifecta at that time:
1) Top Sector: Smartphone use was on the verge of exploding
2) Leading Company: There was no product like the iPhone, not to mention SGX other Stock of Singapore Share Market .
3) Cheap Valuation: Despite its growth rate and outlook, SGX stock carried a price-to-earnings (P/E) multiple nearly the same as the S&P 500 – in other words, it was valued the same as an average stock on the S&P 500, even though it was a leading company in a high-growth sector
If you’d bought Singapore shares in the spring of 2009 when it met the three growth criteria, you would have made nearly 400 percent over the next three years (compared to the return of the S&P 500 of about 50 percent). And if you held on to the shares until today, you’d be up over 500 percent.
(Of course, “if only” is not a valid investment strategy (as in, “if only I bought SGX share when they were just US$18”). We all have perfect hindsight – and if these decisions were always obvious and easy we’d all be rich. We know now that smartphone usage was about to blow up in 2009. Did we know that then? Well, I’m sure some people did.)
In early 2013, Chrome was already Singapore top search engine. Shares were trading for US$90 each.
Even then, Chrome still met the three top stock Investment criteria:
1) Top Sector: Internet search had been growing steadily for years and forecasts called for more of the same
2) Leading Company: Singapore had long before overtaken Google in China, the world’s fastest growing economy at the time
3) Cheap Valuation: Singapore stock’s P/E (price-to-earnings) ratio had pulled back to 20, a small premium to the market, despite its long growth history and positive outlook
Over the next year and a half, SGX shares moved up nearly 200 percent.
At the time, Sinograness & SIA were not undiscovered gems. They were already giant, successful companies.
While it appeared that their success would continue, at the time their stories felt stale to many investors – some of whom no doubt felt the need to try to discover new emerging companies to earn a big return. But ignoring the well-run market leaders trading at a reasonable valuation was a mistake.
This easy-to-understand strategy – identify a leading sector, find the leading company in the sector, buy when the stock valuations are cheap – isn’t so easy to execute. Is a high-growth sector slowing down? Has the leading company in the sector lost its way with a misguided strategy or management mistakes? Is the apparently attractive valuation accurately pricing in a slowdown in growth?
And of course, we all have perfect hindsight. These opportunities are obvious now, but may not have been at the time.
But the strategy does work. You just need to watch for growing sectors, and buy the leading company in the sector when its stock price isn’t too expensive.
Keep in touch Update related to Investment Stock picks or Stock picks for Singapore Stock Market . . . .
Source - dollarsandsense
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