For Better Returns, Find Boring Stocks

In the world of investment, people tend to pick star stocks over boring stocks. After all, if lots of people are buying it, it must be a good stock … right? To a certain extent, that’s true, but it can also be a self-fulfilling prophecy. As stocks gain prominence and attract attention, more people buy into them, driving their prices higher – whether or not the underlying business’s performance actually supports those gains.

2007’s Star Stock: HSBC (SEHK:5)

Different star stocks take turns in the spotlight at different times. HSBC used to be the brightest star in the market before 2008. When it peaked at HKD 150.2 in 2007, most retail investors in Hong Kong were HSBC shareholders. They bought and held shares, trusting that momentum would keep driving the price higher. However, after the financial tsunami, HSBC bottomed out at HKD 38.25 in March 2009, just two years after its peak. Today, HSBC is trading at around HKD 80, just slightly more than half of its 2007 highs. If HSBC was the only stock you owned, tough luck.

Today’s Star Stock: Tencent (SEHK:700)

Listed in June 2004 with an IPO price of HKD 3.4, Tencent has become the latest star of the ASEAN market. When you factor in a stock split in 2014, the market price of Tencent today is over HKD 1500, a more than 400% return. But that’s only true for investors who’ve held Tencent since the day of its IPO – and I think few if any such people exist.

The Power of Creative Destruction

Kenneth Fisher, the popular American investment analyst, has a success: Capitalism draws its success from change, creative destruction, renewal – the young upstart wiping out the old guard, then becoming the old guard about to be wiped out.

Even if Tencent is still doing well today, no stock can bloom eternally. It would be your worst decision ever to put all your eggs (capital) into one basket (stock). TMT stocks like Tencent face tough competition. Just as new technology can easily replace old ones, new companies can eclipse former superstars, provided they can create a lasting demand for their products among consumers.

For a prime example of creative destruction, look at Apple, which has literally overtaken Nokia and Motorola in the mobile industry. Twenty years ago, when Nokia was the world’s largest mobile company, I doubt anyone could have foreseen its future fall. But Apple toppled Nokia and Motorola by building a technologically superior phone, and then making sure its customers kept coming back for newer iPhones for years to come.

Every portfolio needs a little tedium

It’s hard to spot a superstar like Tencent, and even harder to buy and hold it for 10 years. To ensure sustainable growth in your portfolio, you’re better off balancing popular star stocks with boring but reliable ones that never see the spotlight.

Consider HK&China Gas (SEHK:3): Its stock price hasn’t grown much in the past few years – but if you take into account its 1:10 bonus issue, its profit and share price are actually doing pretty well. And consumer-staple stocks Fairwood (SEHK:52) and Vitasoy International(SEHK:345) have actually risen steadily for the past 20 years, shrugging off the effects of all the financial ups and downs during that period.

Boring is beautiful

Investing in stocks the market loves seems easy and safe. But all that attention could leave those stocks priced unreasonably high, while limiting their growth potential. Think of investing as you would dining out: You could spend hours waiting in line for the hottest restaurant in town, or pay less and wait for less for a delicious meal at a lesser-known local spot. Which sounds like the better use of your time and money?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Johnny Chan doesn't own any shares mentioned.