Good Fundamental Stocks Always Provide Good Returns?

Published on Star Business: 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.

There are issues I would disagree!

1. One cannot simply use Warran Buffett and Berkshire as a comparison. Bottom line here for me, this is Malaysia and the companies that one can invest in simply pales in comparison to the companies that Warren Buffett and Berkshire invests in.

Simplest example. Take Coca-cola for example. Does the local companies here have the same durable long competitive advantage that Coca-cola has? What about the management?

If our companies pale in comparison, then can the same investing strategy work? Can we pick any stock at any price and apply the same investing strategy?

Buy and hold would not work if the company pales in comparison.

2. Can one buy and hold any fundamental stock at any price and hold it long term?

The pricing of one's investing is always important! Price is what you pay and value is what you get!

Take Coca-Cola. It is a good 'fundamental stock' yes? ( Hate that term 'fundamental stock'! Absolutely hate such labeling of a stock! )

Can one buy Coca-Cola and hold it long term and assume that they will always give a good return?

Simplest logical reasoning would dictate that if one overpays for the investment, holding the investment for a long term simply does not correct our initial investment mistake of overpaying for our investment!

Don't believe?

In 1998, Coca-cola used to trade as high as 80 bucks.

Let's not use the folly of buying Coca-Cola at 80 bucks. How about buying Coca-cola at 65.00. (65 looks a much cheaper 'discount' from 80, yes?)

The below chart of Coca-cola since 1998 says a lot of things.

Coca-cola today is only some 44 bucks! And if one had purchased Coca-cola at 65 bucks back in 1999 and held their investment for a decade, did this 'Fundamental stock always provide a good returns'?

Is Coca-cola a bad business? Hell no. I think it's a wonderful business!

So why did 'it' failed?

Simple! When you pay too much for your investment, most likely than not, you would NOT get a good return at all!

Take local Malaysian stocks.

Take Parkson Holdings ( I would argue against it being as a good 'fundamental stock'!). If one had over-paid their investment in this stock at 8.00 last year, the stock is now worth 3.40!!!!!

Want to hold it long term? We shall see!

Pricing does matter yes?

ps. I do believe in investing but not as how it's preached locally!!