Every investor at some point looks back and says “wish I’d bought that company 10 years ago…”
There is no better time to have this thought than on the 10-year anniversary of Lehman Brothers’ collapse, which marked the last global financial crisis.
After all, who would say no to the 40% return per annum (p.a.) delivered by Restaurant Brands over the past 10 years (from end of October 2008). This handsomely beat having cash in the bank, the returns of the NZ market at 13% p.a., and global markets (MSCI World – an index of global stocks) at 11% p.a.
Restaurant Brands, with hindsight, offered an opportunity to earn 27 times your money in October 2008; and, if you really had the Midas touch, A2 Milk was even better at 110 times, enough to turn a $10,000 initial investment into more than $1 million!
International shares, too, had a small group of high returning opportunities over the past 10 years: Amazon 33x; Mastercard 14x; Apple 15x; HDFC Bank (one of the better run private Indian banks) 9x; Tencent (the Chinese internet media giant) 29x; and in Australia, REA Group 23x and Aristocrat Leisure 8x, to name a few.
Investing is easy (with tongue in cheek).
The first question an inquisitive, sceptical reader may voice is ‘discovery’ – how do you identify this handful of superstocks in practice, without perfect foresight?
At Milford, we analyse companies for sustainable competitive advantages, industry landscape, profitability trends, and the long-term potential of their businesses. The global equity team focuses on best-in-class companies in favourable sectors by carrying out fundamental research. This weeds out some of the pretenders. It is not perfect as there are high-fliers who fall from grace. But the team continually monitor developments to ensure the portfolio companies are generally headed in the right direction. While a whole portfolio of hits would be fantastic, it only takes a few of these high-performers to make a difference.
Interestingly, of the strong 10-year performers noted (see table below, middle column “At the halfway mark”), most of them were already clearly running ahead of the market at the 5-year mark – i.e. they tend to outperform consistently. It is very rare for a share to not perform for 9 years and then deliver a 10x gain in the 10th. By marrying fundamental research and continual monitoring of companies that have done well, investors have a decent shot at finding which companies are likely to do well in the future.
So, discovering the best companies is a challenge but it is only part of the problem. Hard work and common sense can help improve the odds. But contrary to conventional wisdom, the more difficult challenge is to ‘stay the course’.
The returns cited in the table below are holding period returns, where one invests on 1 November 2008 and holds for 10 years – all the way through. This is easier said than done, but the potential benefits are significant. It is why Warren Buffett’s favourite holding period is ‘forever’. In less romantic terms, one may call this ‘run your winners’.
In practice, an investor’s capital may be required for other financial needs, cutting the investment short. Human emotions and media headlines about imminent market meltdowns and the wrath of Donald Trump all add to the difficulty of standing pat. Relative to ‘discovery’, the odds are completely stacked against the investor to ‘stay the course’. The temptation to quit, take profit and cut loss when faced with the drawdowns (decline in value from prior peak – see the final group of columns in the below data table) that even these top performers had to go through, is great.
Some may say, there are many ways to invest, including trading. Certainly, investors who can buy in and get out at the right time (repeatedly) will do well. This is a rare skill. The message of this blog is to distil investing to its simplest form and illustrate what you need to do well.
Being comfortable with how your investment can rise and fall can help you stay the course. As investment managers, the conviction afforded by our research helps us get what we judge to be the best ideas into the fund and weather the ups and downs. The continual monitoring of company developments limits the cost of our mistakes as there will be ones which do fall short. A portfolio approach and sensible position sizing aims to smooth out the most volatile periods.
We are often asked, “how do you cover the world from little New Zealand?” – i.e. ‘discovery’. The answer is we focus resources on a short list of promising companies. A much more interesting and important question is, “can you stay the course?”
Data table showing historical returns and drawdowns for a small group of high performers.