23 April 2017
5 Things Every Investor Needs To Know
BY Chong Ser Jing | 22 April, 2017
The stock market can be a great place to build lasting long-term wealth. But, that can only happen if investors have access to information which can help them better understand what investing and the stock market is really like.
Such information may at times be hard to come by. So, here’s a list of five things (in no particular order) that every investor needs to know:
1. The stock market is very volatile over the short-term, but tends to move up over the long-term.
In the 15 years between 2002 and 2016, the Straits Times Index made annual losses of 10% or more in four separate years. In 2008, the index even declined by 47%. That’s rough.
But, the Straits Times Index has also gained 183% in total (inclusive of dividends) over the same period. With the stock market, you’d have to suffer some short-term pain for solid long-term gains.
2. A cheap valuation offers no protection whatsoever against losses over the short-term.
For those with a little more experience in the stock market, it may be common to hear the refrain that it’s better to invest when stocks are cheap. That’s sound advice – but it’s only half-true.
Source: Robert Shiller; author’s calculations
The chart above plots the annual returns of the S&P 500 against its starting valuation for a one year holding period using data that stretches from 1871 to 2013. As you can see, the chart’s essentially a scatter-plot – a low valuation can just as easily result in a great return as a poor one. This brings me to the whole-truth in the next important thing investors must know.
3. Buying stocks when they’re cheap helps you stack the odds of success in your favour over the long-term.
Chart 2 below is similar to Chart 1, except that it’s showing the S&P 500’s annual returns for a 10-year holding period.
Source: Robert Shiller; author’s calculations
When the investing time horizon’s stretched out from 1 year to 10 years, there’s now a much clearer relationship between a share’s valuation and its return – if you invest when stocks carry a low valuation, your chances of earning a good return become much higher. This is certainly not a water-tight conclusion, but it’s still very useful knowledge to have.
4. What the economy does and how stocks perform can have very little correlation over both the long- and short-term.
The fourth thing here that investors must know is counter-intuitive but true. I trust it’s easy to observe in Chart 3 that there’s essentially no correlation between Singapore’s annual GDP growth and the yearly returns of the Straits Times Index from 1993 to 2013.
Source: World Bank (for GDP figures); S&P Global Market Intelligence (for Straits Times Index)
The striking dichotomy that can exist between a country’s long-term stock market returns and economic growth is perhaps best exemplified by the following tweet from investment manager Ben Carlson:
Although China’s economy had grown by a heroic annual rate of 15% from 1992 to 2013, its stock market had declined by 2% per year over the same period. Meanwhile, Mexico stocks had climbed by 18% annually for the same timeframe despite its economy expanding by an anaemic 2% per year.
The state of a country’s economy is an important thing to consider when it comes to investing, but it’s not the only thing that matters. Investors who invest largely based on how much a country’s economy can grow may be setting themselves up for a rude shock.
5. The performance of a company’s business is a crucial driver of its share price over the long-term.
Peter Lynch, the legendary manager of the Fidelity Magellan Fund in the U.S. from 1977 to 1990, shared the following classic in a 1994 speech (emphasis is mine):
“I’m trying to convince people there is a method. There are reasons for stocks to go up. This is very magic: it’s a very magic number, easy to remember. Coca-cola is earning 30 times per share what they did 32 years ago; the stock has gone up 30 fold. Bethlehem Steel is earning less than they did 30 years ago – the stock is half its price 30 years ago.
Stocks are not lottery tickets. There’s a company behind every stock – if the company does well, the stock does well. It’s not that complicated.”
I couldn’t have put it any better. That’s how my fellow analysts and I look at it here at Stock Advisor Singapore too.
Follow us on Facebook for the latest in Foolish investing!
The stock market can be a great place to build lasting long-term wealth. But, that can only happen if investors have access to information which can help them better understand what investing and the stock market is really like.
Such information may at times be hard to come by. So, here’s a list of five things (in no particular order) that every investor needs to know:
1. The stock market is very volatile over the short-term, but tends to move up over the long-term.
In the 15 years between 2002 and 2016, the Straits Times Index made annual losses of 10% or more in four separate years. In 2008, the index even declined by 47%. That’s rough.
But, the Straits Times Index has also gained 183% in total (inclusive of dividends) over the same period. With the stock market, you’d have to suffer some short-term pain for solid long-term gains.
2. A cheap valuation offers no protection whatsoever against losses over the short-term.
For those with a little more experience in the stock market, it may be common to hear the refrain that it’s better to invest when stocks are cheap. That’s sound advice – but it’s only half-true.
Source: Robert Shiller; author’s calculations
The chart above plots the annual returns of the S&P 500 against its starting valuation for a one year holding period using data that stretches from 1871 to 2013. As you can see, the chart’s essentially a scatter-plot – a low valuation can just as easily result in a great return as a poor one. This brings me to the whole-truth in the next important thing investors must know.
3. Buying stocks when they’re cheap helps you stack the odds of success in your favour over the long-term.
Chart 2 below is similar to Chart 1, except that it’s showing the S&P 500’s annual returns for a 10-year holding period.
Source: Robert Shiller; author’s calculations
When the investing time horizon’s stretched out from 1 year to 10 years, there’s now a much clearer relationship between a share’s valuation and its return – if you invest when stocks carry a low valuation, your chances of earning a good return become much higher. This is certainly not a water-tight conclusion, but it’s still very useful knowledge to have.
4. What the economy does and how stocks perform can have very little correlation over both the long- and short-term.
The fourth thing here that investors must know is counter-intuitive but true. I trust it’s easy to observe in Chart 3 that there’s essentially no correlation between Singapore’s annual GDP growth and the yearly returns of the Straits Times Index from 1993 to 2013.
Source: World Bank (for GDP figures); S&P Global Market Intelligence (for Straits Times Index)
The striking dichotomy that can exist between a country’s long-term stock market returns and economic growth is perhaps best exemplified by the following tweet from investment manager Ben Carlson:
Although China’s economy had grown by a heroic annual rate of 15% from 1992 to 2013, its stock market had declined by 2% per year over the same period. Meanwhile, Mexico stocks had climbed by 18% annually for the same timeframe despite its economy expanding by an anaemic 2% per year.
The state of a country’s economy is an important thing to consider when it comes to investing, but it’s not the only thing that matters. Investors who invest largely based on how much a country’s economy can grow may be setting themselves up for a rude shock.
5. The performance of a company’s business is a crucial driver of its share price over the long-term.
Peter Lynch, the legendary manager of the Fidelity Magellan Fund in the U.S. from 1977 to 1990, shared the following classic in a 1994 speech (emphasis is mine):
“I’m trying to convince people there is a method. There are reasons for stocks to go up. This is very magic: it’s a very magic number, easy to remember. Coca-cola is earning 30 times per share what they did 32 years ago; the stock has gone up 30 fold. Bethlehem Steel is earning less than they did 30 years ago – the stock is half its price 30 years ago.
Stocks are not lottery tickets. There’s a company behind every stock – if the company does well, the stock does well. It’s not that complicated.”
I couldn’t have put it any better. That’s how my fellow analysts and I look at it here at Stock Advisor Singapore too.
Follow us on Facebook for the latest in Foolish investing!
Labels: Investment Quote
