Lessons on investing don’t just have to be learnt from complicated market reports and expert tips. Very often, some of the simplest lessons on how to grow your money can come from places that are in our general day to day blind spots. The Motley Fool shares some interesting lessons on investing that you can learn from the most unexpected of people:
Last Wednesday, as I was waiting for my friend at Boon Keng MRT, I noticed an old man holding a huge clear bag half-filled with crushed aluminium soft drink cans in one hand while the other hand was busy juggling a few uncrushed cans.
He then unceremoniously set down the huge bag and the uncrushed cans, took the first uncrushed can, emptied the contents that were still left and placed it upright on the floor. Using his right foot to crush the can, the old man chucked the crushed can into the bag, and moved onto the next can.
As I was observing what was happening, I realised the episode can be likened to the stock market.
A Coke Can for You?
People throw away the aluminium cans thinking they are useless and that they do not provide any value after they finish their drink. However, this isn’t entirely the case. The cans still have value. If not, the old man would not have bothered collecting the cans, crushing them and chucking them into his bag religiously, so as to sell them off later.
For every can the man sells, he would have made infinite returns per can as each can did not cost him any money. When others did not see value in the “useless” cans, the old man saw its true value.
In a similar sense, stocks are often times dumped unnecessarily during an economic crisis, temporary company setbacks or just for some random reason. Some investors fail to understand that a particular stock might still have some value despite difficulties in the external environment.
During the depths of the most recent financial crisis in 2008/2009, when the Straits Times Index (SGX: ^STI) plunged to a low of around 60% from its 2007 peak, Raffles Medical Group Ltd. (SGX: R01) was valued at around 8 times trailing earnings and going at S$0.56 apiece. That compares favourably against Raffles Medical’s average PE of approximately 25 over the past ten years. Now, the same company is selling at S$4. This translates to returns upwards of 600%.
Investors were dumping stocks of the private medical outfit during the crisis without understanding that the business was still chugging along well and that patients were still visiting the doctors at its various clinics interspersed throughout Singapore.
Another company whose shares got thrown out of the window following a temporary company setback is OSIM International Ltd. (SGX: O23). Its share price plunged to a low of $0.055 in early 2009 due to losses in an investment in Brookstone, a chain of retail stores in the United States. The recession in 2008/2009 hugely affected the business and this caused a massive plunge in the share price. However, Osim had learnt from the episode and had since written off the investment. Now, Osim shares are selling at S$2.63.
Investors who saw value in the shares that were dumped pointlessly and picked them up when no one wanted them, were rewarded handsomely. Being a contrarian pays.
The old man reminded me that price is what you pay, value is what you get. During a market crash, stocks will get dumped but the value may still be intact.
Another Old Man, who goes by the name of Warren Buffett, said that we have to be greedy when others are fearful. When people are fearful and are selling stocks without any regard to the business fundamentals, we have to be greedy enough to pick up the pieces and not be apprehensive about what others will think of our actions.
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