A stock market gift right under your nose

INVESTORS do not know what to make of the US stock market today. Like being on a roller coaster, they are thrilled by the recent rise in shares, but dread the drop which may come next.

In their bewilderment, they may miss a great gift the stock market has created.

For context, Nasdaq Composite Index (INDEX: .IXIC) has rallied by nearly 33 per cent for the first half of this year, clocking its biggest gain since 1983. This run comes as a huge relief after the bellwether technology index suffered a similar-sized decline last year.

At the same time, there is apprehension over how long this rally will last. Those who are invested fear losing what they have gained. Meanwhile, others who are sitting on the sidelines are perplexed over whether to wait or risk losing out on further gains.

Interestingly, both parties may be missing out on a simple point.

The best returns in the stock market

In my book, the best returns come from owning stocks for the long term.

For example, I have owned shares of Apple (NASDAQ: AAPL); Amazon (NASDAQ: AMZN); Booking Holdings (NASDAQ: BKNG); and Intuitive Surgical (NASDAQ: ISRG) since 2010.

On average, these shares have grown by almost 17 times their original value, turning each dollar invested to nearly US$17 over the past 13 years.

The key ingredient here is time. But the trick is knowing what shares to hold.

Ideally, the business behind the stock should exhibit the ability to grow in both good times and bad. When businesses are able to deliver huge increases in earnings over time, your odds of a good outcome increase.

Here is your big hint. If companies can perform during a tough economy, it stands to reason that they will do as well or better, when the economic conditions improve. And if they outperform, it is a great recipe for long-term investment returns.

Unconvinced? Let me give you some examples. Back in 2010, companies were coming out of the great financial crisis (GFC) which ravaged businesses all around. Few were spared. Does that sound familiar today?

Here is the thing: the group that thrived may not be the ones you expect.

Thriving despite tough times

For instance, you may expect travel budgets to suffer in a recession. Yet, the data says otherwise.

Booking Holdings, which owns popular travel booking sites such as Booking.com and Agoda, reported revenue and profit growth of over 65 per cent and nearly 149 per cent, respectively, between 2007 and 2009 at the worst of the GFC.

Post-GFC, the company outperformed. From 2009 to today, Booking Holdings’ revenue and net profit soared by almost eight-fold and over nine-fold, respectively.

The shares I bought are up by more than 900 per cent, closely mirroring its profit increase, demonstrating that stock returns followed growth over the past 13 years.

Likewise, Apple’s iPhone was criticised for being too expensive back in 2007. Yet, its sales from 2007 to 2009 (the GFC period) show that the smartphone is far from a discretionary purchase. In fact, the iPhone drove Apple’s revenue and earnings per share (EPS) – up 52 per cent and 60 per cent, respectively, during this tumultuous period.

Today, revenue is more than 10-fold the 2009 level and over 26 times the EPS. The shares which I own since 2010 are up 21 times, another marker that returns follow actual growth.

Simply said, both Apple and Booking Holdings, along with Intuitive Surgical and Amazon, thrived during difficult times and prospered as economic conditions improved.

Here is the kicker. The stock market is offering the same chance of finding similar companies today.

Stocks for the long run

A key reason why I chose this quartet of stocks in 2010 is due to their strong performance during the difficult GFC period. Today, you have similar conditions.

Last year, business growth stalled due to issues ranging from unfavourable exchange rates to supply chain disruptions and rising interest rates. But behind these troubles, you are being gifted real-world data on a select group of businesses that thrived, despite the circumstances.

Best of all, this information is not hidden in any way. You simply have to look at the latest annual reports and run through the earnings transcripts to find how each company performed under challenging situations last year. As the companies are publicly listed, the data is accessible in just a few clicks.

Said another way, you do not have to guess which companies will do well in bad times, you can sieve through the available data and see for yourself. At the end of this process, you should have a list of potential stocks to buy.

This list, I submit, should comprise a superior set of companies to start your research. Instead of looking for a needle in a haystack, you will be able to dramatically narrow down your search, right off the bat. As far as gifts from the stock market go, that is hard to beat.

Get smart: the gift that keeps giving

One final point. When I bought the four stocks in 2010, the prices I paid were far from the lowest you could get. Prices were much lower during the downturn in 2008 and 2009.

Apple, for instance, had risen by over 200 per cent from its 2009 lows by the time I bought its stocks. Likewise, shares of Booking Holdings, previously known as Priceline, had already soared by nearly 280 per cent before it debuted in my stock portfolio.

Said another way, you do not need to get the best prices to score satisfying returns.

So, instead of worrying over what the stock market will do next, why not curate a watchlist of stocks for yourself? If the stock market falls, you will know ahead of time what stocks you want to buy.

Alternatively, you can choose to invest a little and wait for a better price to come your way. Either way, the gift that the stock market offers today should not be wasted.

After a tumultuous period in 2022, the opportunity is there for you to make the best out of the real-world data at your fingertips.

In time, your stocks may well be the gift that keeps on giving.

The writer still owns all the stocks mentioned. He is co-founder of The Smart Investor (https://thesmartinvestor.com.sg), a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage.