Here’s why you need to avoid the stock market (yes, really!)

Jack Bogle, founder and retired CEO of The Vanguard Group, nailed the concept of investing when he said back in 2007:

The stock market is a giant distraction to the business of investing.

This comment crystallises for me at least how I invest my own money, and what better time than the August reporting season (for the end of the 2015-16 financial year) to concentrate on what the companies I look to invest in (or not) are reporting.

At the large end of town in the S&P/ASX 20 (INDEXASX: XTL) are companies which have generally performed abysmally (note: I’m talking business performance here).

For example, the Commonwealth Bank of Australia (ASX: CBA) reported an increase in its cash net profit of 3%, but a decrease in cash earnings-per-share (EPS) of 1%.

There’s BHP Billiton Limited (ASX: BHP) in this list as well. It used to be the “Big Australian” and the biggest company on the ASX by market-cap, but today has fallen to sixth. BHP’s results were a disaster: a US$6.4 billion loss as a consequence of smashed revenues, write-offs and the Samarco Dam tragedy.

Then there’s Woodside Petroleum Limited (ASX: WPL). If I owned shares, I’d be disappointed with the reported numbers: Sales revenue down 22%, after-tax net profit and EPS down 50%, and dividends down 48%.

As you can tell, the results above weren’t exactly great for shareholders, but it’s important to note that the measurement of how your investment is progressing should primarily focus on business performance (whether good or bad).

On the bright side, looking outside of the top-20, there have also been some very good results in the last couple of weeks and I don’t think it’s a coincidence that these companies are smaller and less mature (in terms of their potential product-markets).

Bellamy’s Australia Ltd (ASX: BAL) lifted revenue 95%, net profit 326% and diluted earnings per share 306%.

Webjet Limited (ASX: WEB) increased its net profit and revenues by 27% and 30% respectively, and Challenger Ltd (ASX: CGF) revealed an increase in normalised net profit and dividend of 8%, normalised EPS of 6%, and annuity sales up 22%.

As goes the economic performance of the company, so follows the share price over the long term.

Here are two companies with their respective growth rates in net profit compared with their share price performance:

Company Net profit for 2000-01 ($m) Net profit ($m) CAGR * in net profit (%) CAGR in return to shareholders (inclusive of dividends)
Cochlear Limited (ASX: COH) 31.2 188.9 ** 12.76 12.29
Ramsay Health Care Limited (ASX: RHC) 15.875 385.542 *** 25.59 29.45

* compound annual growth rate

** net profit for 2015-16

*** net profit for 2014-15

As you can see from the two columns on the right (above), the share price return approximates the growth in net profit over a suitable timespan, in this case 14 years for Ramsay Health Care and 15 years for Cochlear.

A $10,000 investment in August of 2001 for Cochlear and Ramsay Health Care has grown to $56,901 and $154,070 respectively today.

Long-term investing though can also be a dismal place for your money if you back the wrong horse.

Take QBE Insurance Group Ltd (ASX: QBE) and Santos Ltd (ASX: STO) for example. Respectively, returns from each of these companies over 15 years have averaged 5.27% and 5.87% per annum. In other words, for all of the risks you’ve taken on in investing in these companies, you’ve only managed to grow your $10,000 into $21,606 by buying QBE and $23,528 for owning Santos (and that doesn’t even account for the extreme volatility you would have experienced along the way).

By contrast, the S&P/ASX All Ordinaries Accumulation Index has delivered 10.8% per annum over the same time period.

Foolish takeaway

Without a doubt, the greatest rewards and risks come from owning shares in listed companies, but to do well, you’re going to have to be selective.

Whether your investment proves to be successful or not won’t be because of the vicissitudes of the stock market at large. That is, your shares won’t simply be randomly marked up or down for no reason over longer time frames.

But what share prices will do though is follow the economic performance of the enterprise. This is why you can see such vast differences in many companies on the ASX (and in this article).

By all means, check the prices of your shares every so often (if you must), but don’t avoid reading and understanding your company’s half-year and yearly annual reports.

This is critical to knowing how your investment is actually performing and, with a long-term owner’s mindset, demonstrating for yourself exactly how real investing should be.

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Motley Fool contributor Edward Vesely owns shares of Bellamy's Australia and Ramsay Health Care Limited. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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