The Stock Market Is Easy to Understand
I remember a taxi ride I once took a few years ago. When I was in the cab, the friendly driver asked what I did for a living. I told him I was in the finance industry and that part of my job involved writing articles on my observations about the stock market.
The driver’s response was that stocks were incredibly complicated creatures to him. He did not understand how the stock market works.
I wish now that I had told him about an interesting anecdote the great investor Peter Lynch once shared. In a 1994 speech, Lynch, who attained legendary status in the investing community by delivering 29% annual returns as the head of the Fidelity Magellan Fund from 1977 to 1990, said:
“I’m trying to convince people there is a method. There are reasons for stocks to go up. This is very magic: it’s a very magic number, easy to remember. Coca-cola is earning 30 times per share what they did 32 years ago; the stock has gone up 30 fold. Bethlehem Steel is earning less than they did 30 years ago – the stock is half its price 30 years ago.
Stocks are not lottery tickets. There’s a company behind every stock – if the company does well, the stock does well. It’s not that complicated.”
Billionaire investor Warren Buffett puts it in another way: “If the business does well, the stock eventually follows.” That’s really all there is to it in the stock market. Over the long-term, it’s the business performance of a stock that determines how its price would change.
We can see this very clearly from some of the Singapore stock market’s biggest winners and losers over the decade ended 11 April 2017. In the winners category are stocks such as Poh Tiong Choon Logistics Ltd (SGX: P01), Riverstone Holdings Limited (SGX: AP4), and Straco Corporation Ltd (SGX: S85). Coming to the losing stocks, some of them are Metech International Ltd (SGX: QG1), Infinio Group Ltd (SGX: 5G4), and Magnus Energy Group Ltd (SGX: 41S).
Here’s a table showing the six stocks’ returns and changes in their earnings per share (note how the winners had higher earnings while the losers either saw their earnings crumble or struggled to make a profit):
Source: S&P Global Market Intelligence
The stock market is easy to understand. Over the long run, stocks fall if their businesses don’t do well; conversely, stocks tend to soar if their businesses perform well.