Here Are 24 Things Everyone Should Know About Investing
In no particular order of merit, here are 24 things I think everyone should know about investing:
1. Stocks can rise and fall by 30% or more despite there being hardly any change to their underlying business performances. (For more, head here)
2. Stocks that are part of the Straits Times Index’s (SGX: ^STI) 30 constituents are often known as blue chips. They also tend to carry an exalted status amongst investors. But, blue chips can make for poor long-term investments. Case in point: One of Singapore’s largest property developers, City Developments Limited (SGX: C09), has delivered a return of -26% over the past 10 years even after accounting for dividends.
3. Historically, the performance of Singapore’s stock market in each year has no real connection to the performance of its economy. (For more, head here)
4. Large daily declines in the Straits Times Index are a common occurrence. There have been 5,812 trading days from the start of 1993 to 12 August 2015. Of the 5,812 trading days, there have been 238 days in which the index experienced a daily decline of 2% or more.
5. Extreme valuations can happen in the market. In the case of the Straits Times Index, it had a price-to-earnings (PE) ratio of 35 in 1973 and just 6 at the start of 2009.
6. Over the 37-year stretch from 1973 to 2010, the Straits Times Index had an average PE ratio of 16.9.
7. Numbers from history show that the longer you had stayed invested in the Straits Time Index, the lower your odds of losing money. (For more, head here)
8. Stocks don’t necessarily rebound after falling hard. According to a study by J.P. Morgan, 40% of all stocks in the Russell 3000 index in the US from 1980 to 2014 had suffered a permanent decline of 70% or more from their peak values.
9. Investors could possibly feel real physical pain when going against the investing-crowd. (For more, head here)
10. Fund managers with horrendous long-term track records can still manage hundreds of millions of dollars. John Hussman is a good example. His Hussman Strategic Growth fund has lost 5.77% per year over the 10 last years according to data from Morningstar. Yet, the fund has total assets of US$403.5 million currently.
11. Even the best long-term winners in the stock market can cause investors severe pain over the short-term. In the timeframe stretching from 1995 to 2015, energy drinks maker Monster Beverage was the best performing stock in the US with a total return of 105,000%. Every $1,000 invested in Monster Beverage in 1995 would have become $1.05 million in 2015. Yet, from 1995 to 2015, Monster Beverage’s stock had (a) dropped by 50% or more from a peak on four separate occasions, (b) lost more than two-thirds of its value twice, and (c) fell more than three-quarters once.
12. From 11 February 2016 to 21 December 2016, the price of WTI Crude Oil essentially doubled. But over the same period, a collection of 50 oil & gas stocks in Singapore – this includes the giants such as Keppel Corporation Limited (SGX: BN4), and the smaller entities such as KS Energy Limited (SGX: 578) – saw their stock prices decline by 11.9% on average. A commodity-related stock can be a lousy investment even if the price of the commodity in question actually rises.
13. Compounding takes time but is an incredible thing. Over 99% of the net worth of 86-year old Warren Buffett came after his 50th birthday. Forbes estimates Buffett’s wealth to be US$74.4 billion currently.
14. A $10,000 investment compounding at 10% per year will become $108,000 after 25 years. The same $10,000 investment compounding at the same rate of 10% per year will become less than $75,000 after 25 years if annual fees of just 0.99% are deducted. Fees matter in investing.
15. When the markets are roiling, individual investors can actually remain remarkably calm. (For more, head here)
16. Horrible industries can still produce incredible investment opportunities. For a long time, the airlines industry has had a reputation for delivering poor returns to investors. But in the 30 years ended 2002, the US stock market’s best stock was… Southwest Airlines.
17. Investors in a stellar investment fund can still end up with poor results. In the decade ended 2009, the CGM Focus Fund had gained 18% per year. But unfortunately, its investors had lost 11% annually. The reason? The CGM Focus Fund’s investors had essentially bought and sold at the wrong times (they bought when the fund was high and sold when it was low).
18. The stock market can be easier to predict over the long-term than over the short-term. (For more, head here)
19. Professional fund managers can at times be unable to invest in the best way they can for you. Why? It’s because of career risk. (For more, head here)
20. Some fund managers are able to make money even when the stock they’ve bought goes bankrupt. (For more, head here)
21. Winners of Nobel Prizes in economics have run hedge funds that have gone bust. (For more, head here)
22. MENSA is an organisation whose members are made up of individuals who possess IQs in the top 2% of the population. In the 15 years ended 2001, Mensa’s investing club in the US generated returns of just 2.5% per year even when the country’s stock market had gained 15% annually. Intelligence is not the most important thing in investing. (For more, head here)
23. Valuation models that have worked for 50 years can suddenly stop working. (For more, head here)
24. There can be good reasons why stocks are bound to crash from time to time. (For more, head here)