10 September 2013
You Can’t Make Short-Term Predictions In Investing
By Ser Jing Chong - September 10, 2013
Wouldn’t it be great if we could always have a clear picture of how the markets are going to be like one or two years out into the future? That way, we can always position ourselves carefully to reap outsized rewards in double-quick time. Thing is, no one can.
The Bad News: You Can’t Predict
Investment firm Franklin Templeton Investments conducted its 2012 Global Investor Sentiment Survey (link opens a PDF) on February last year where 20,632 individuals across 19 countries (including USA, Germany, UK, Australia, China, Hong Kong, Japan, and Singapore) were polled on their “outlook and perceptions of investing within and outside their home countries.”
If I were to focus on us Singaporeans, the survey found that the top three asset classes that we expected to do well in 2012 were: 1) Precious Metals, 2) Non-Metal Commodities, and 3) Real Estate. Given that the Straits Times Index (SGX: ^STI) ended 2011 with an annual decline of 17%, you might not be surprised to see investors shunning the stock market here and hoping other asset classes would be able to help them build wealth.
But, as I’m going to show shortly, the expectations of the polled-investors here were just plain wrong.
This is how some of the asset classes – that we expected to do well in the year – actually did in 2012:
Asset Price Feb 2012 Dec 2012 Change
Gold (Precious Metal) S$2183 S$2046 -6.3%
Silver (Precious Metal) S$43 S$39 -9.2%
Crude Oil (Non-Metal Commodities) S$141 S$124 -12.6%
Commodity Price Index 196 182 -6.8%
Singapore Housing Index (Real Estate)** 247 256 3.6%
** The Singapore Housing Index data for Feb 2012 and Dec 2012 are for the first quarter of 2012 and the last quarter of 2012 respectively.
Sources: For Gold price, see Gold Price Network. For Silver price, see Index Mundi. For Crude Oil price, see Index Mundi. For Commodity Price Index, see Index Mundi. For Singapore Housing Index, see Trading Economics.
And now for the kicker: the most accessible barometer for our general stock market, the Straits Times Index (SGX: ^STI), actually ended 2012 with an 18% gain. Investors who invested in plain-vanilla STI-trackers like the SPDR STI ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B) would have gotten returns very similar to that of the index after deduction of relevant fees and expenses.
Those who positioned themselves into precious metals, commodities or real-estate investments hoping to bag nice gains last year would have done much better by simply buying an index tracker that mimics the STI.
More Bad News Showing You Can’t Predict…
Lest you think the results of the Franklin Templeton survey are a one-off, consider this: JP Morgan found that its JP Morgan Investor Confidence Index (JPMICI) was at 134 in January 2011, in effect telling us that “investors showed strong levels of optimism” back then. JP Morgan went on to add that “investors expect[ed] the Singapore Straits Times Index (STI) to increase in the next six months.”
I guess you should know what happens next. The STI went on to decline by 3.6% from 3,236 points at the start of Jan 2011 to 3,120 points at the end of June 2011. Unfortunately, “strong levels of optimism” and an expectation for the STI to increase does not mean that reality will conform.
If we were to go further back in time, hardly anyone got it right by calling out in advance, the recession that occurred in 2008 caused by the Great Financial Crisis that started in 2007, and the subsequent stupendous stock market rebound that took place in early 2009.
So, what do all these tell us? The simple takeaway is that we’re poor, perhaps very poor, at predicting short-term price movements in the markets.
Does It Matter?
But, does it make a difference to us to know we’re simply inept at predictions? Of course it does!
Stock market investors in the USA suffered extremely poor returns compared to the overall market because of a mistaken belief in their ability to time the market by making short-term predictions on price movements in order to catch exact tops and bottoms.
If we know exactly how bad we are at guessing where the STI, S&P 500, Hang Seng Index, orwill be in the next day, week, month or even year, perhaps we can improve our investment returns by doing things differently.
Doing Things Differently
By ‘different’, I mean we could adopt the long-term view. Over the past 25 years since the start of 1988, the STI has given us an average annualised return of around 7% or more (inclusive of dividends). An investor need not have to frenetically trade in-and-out of the index, nor waste precious mental effort to make poor guesses about where the index will be in the near future, in order to enjoy the 7% returns from the STI. All he had to do was to buy… and hold.
Even individual shares like Jardine Matheson Holdings (SGX: J36), Jardine Strategic Holdings (SGX: J37) and Super Group (SGX: S10) have made investors many, many, times their original investment over the past 10-plus years since Jan 2013 by growing their sales and profits, which in turn increases the intrinsic value of their businesses. And again, all the investor had to do then, after a careful appraisal of these companies’ businesses, was to buy and hold.
Foolish Bottom Line
The great scientist Albert Einstein was reputedly quoted as saying that “insanity is doing the same thing over and over again and expecting different results.” History and research has shown us that we’re simply no good at making predictions, so why bother to continue doing so?
I know I wouldn’t want to be labelled as insane by Einstein. Would you?
Wouldn’t it be great if we could always have a clear picture of how the markets are going to be like one or two years out into the future? That way, we can always position ourselves carefully to reap outsized rewards in double-quick time. Thing is, no one can.
The Bad News: You Can’t Predict
Investment firm Franklin Templeton Investments conducted its 2012 Global Investor Sentiment Survey (link opens a PDF) on February last year where 20,632 individuals across 19 countries (including USA, Germany, UK, Australia, China, Hong Kong, Japan, and Singapore) were polled on their “outlook and perceptions of investing within and outside their home countries.”
If I were to focus on us Singaporeans, the survey found that the top three asset classes that we expected to do well in 2012 were: 1) Precious Metals, 2) Non-Metal Commodities, and 3) Real Estate. Given that the Straits Times Index (SGX: ^STI) ended 2011 with an annual decline of 17%, you might not be surprised to see investors shunning the stock market here and hoping other asset classes would be able to help them build wealth.
But, as I’m going to show shortly, the expectations of the polled-investors here were just plain wrong.
This is how some of the asset classes – that we expected to do well in the year – actually did in 2012:
Asset Price Feb 2012 Dec 2012 Change
Gold (Precious Metal) S$2183 S$2046 -6.3%
Silver (Precious Metal) S$43 S$39 -9.2%
Crude Oil (Non-Metal Commodities) S$141 S$124 -12.6%
Commodity Price Index 196 182 -6.8%
Singapore Housing Index (Real Estate)** 247 256 3.6%
** The Singapore Housing Index data for Feb 2012 and Dec 2012 are for the first quarter of 2012 and the last quarter of 2012 respectively.
Sources: For Gold price, see Gold Price Network. For Silver price, see Index Mundi. For Crude Oil price, see Index Mundi. For Commodity Price Index, see Index Mundi. For Singapore Housing Index, see Trading Economics.
And now for the kicker: the most accessible barometer for our general stock market, the Straits Times Index (SGX: ^STI), actually ended 2012 with an 18% gain. Investors who invested in plain-vanilla STI-trackers like the SPDR STI ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B) would have gotten returns very similar to that of the index after deduction of relevant fees and expenses.
Those who positioned themselves into precious metals, commodities or real-estate investments hoping to bag nice gains last year would have done much better by simply buying an index tracker that mimics the STI.
More Bad News Showing You Can’t Predict…
Lest you think the results of the Franklin Templeton survey are a one-off, consider this: JP Morgan found that its JP Morgan Investor Confidence Index (JPMICI) was at 134 in January 2011, in effect telling us that “investors showed strong levels of optimism” back then. JP Morgan went on to add that “investors expect[ed] the Singapore Straits Times Index (STI) to increase in the next six months.”
I guess you should know what happens next. The STI went on to decline by 3.6% from 3,236 points at the start of Jan 2011 to 3,120 points at the end of June 2011. Unfortunately, “strong levels of optimism” and an expectation for the STI to increase does not mean that reality will conform.
If we were to go further back in time, hardly anyone got it right by calling out in advance, the recession that occurred in 2008 caused by the Great Financial Crisis that started in 2007, and the subsequent stupendous stock market rebound that took place in early 2009.
So, what do all these tell us? The simple takeaway is that we’re poor, perhaps very poor, at predicting short-term price movements in the markets.
Does It Matter?
But, does it make a difference to us to know we’re simply inept at predictions? Of course it does!
Stock market investors in the USA suffered extremely poor returns compared to the overall market because of a mistaken belief in their ability to time the market by making short-term predictions on price movements in order to catch exact tops and bottoms.
If we know exactly how bad we are at guessing where the STI, S&P 500, Hang Seng Index, or
Doing Things Differently
By ‘different’, I mean we could adopt the long-term view. Over the past 25 years since the start of 1988, the STI has given us an average annualised return of around 7% or more (inclusive of dividends). An investor need not have to frenetically trade in-and-out of the index, nor waste precious mental effort to make poor guesses about where the index will be in the near future, in order to enjoy the 7% returns from the STI. All he had to do was to buy… and hold.
Even individual shares like Jardine Matheson Holdings (SGX: J36), Jardine Strategic Holdings (SGX: J37) and Super Group (SGX: S10) have made investors many, many, times their original investment over the past 10-plus years since Jan 2013 by growing their sales and profits, which in turn increases the intrinsic value of their businesses. And again, all the investor had to do then, after a careful appraisal of these companies’ businesses, was to buy and hold.
Foolish Bottom Line
The great scientist Albert Einstein was reputedly quoted as saying that “insanity is doing the same thing over and over again and expecting different results.” History and research has shown us that we’re simply no good at making predictions, so why bother to continue doing so?
I know I wouldn’t want to be labelled as insane by Einstein. Would you?
