How To Be An Investing Genius

The Motley FoolHere is one of life’s little unanswered questions: Why is it when you tell someone that there are more than a billion stars in the sky, they will nod in total agreement. But if you tell them that the stock market is likely to be higher in ten years’ time, they think you have just come from Mars.

Whether we like it or not, the global economy is growing. Some parts of the globe might not be growing quite as quickly as we would like but the world economy, as a whole, is expanding. It is reckoned to be growing at around 3% a year, which, according to my arithmetic, means that global economic output should double in around 24 years.

Opportunities everywhere

When the global economy grows, it should provide opportunities for companies to supply goods and services to help facilitate and sustain that growth. That in turn should provide opportunities for canny investors.

For instance, over the last ten years or so, mining companies have enjoyed their day in the sun. Oh yes the have. They have extracted lots of brown and shiny stuff from the ground that has helped countries improve their infrastructure. China, for example, has built lots of roads and railways; schools and hospitals and ports and airports.

Eventually, though, a country runs out things that it can build. So, the next stage in China’s development, for example, will be to make use of the many things it has put up, put together and put in place.

The blueprint for China’s transformation, which was unveiled after the Chinese Communist Party’s Third Plenum, has set out the things that need to be done next. The pledges have not been without their critics, though. Reforming China’s economy won’t be easy – it could be easier to herd a clowder of cats.

A glass half full

Meanwhile, parts of Western Europe and America are gradually emerging from their economic slump. The recovery is unlikely to be instantaneous. But they should, nevertheless, recover. For instance, the UK has returned to growth; Ireland is set to leave the European Union bailout scheme and US employment is rising. The glass is looking half full.

Of course, Western economies have been greatly helped by the enormous amount of cheap money that has been magicked by central banks. It is reckoned that around $12 trillion has been pumped into global economies.

However, at some point in the not-too-distant future, central banks around the world will need to think seriously about printing a little less money.

The wings of confidence

Many years ago, I remember teaching my two children to swim. In common with many parents, we bought them both inflatable armbands, otherwise known as water wings. They are designed to help the wearer stay buoyant, boost confidence and slowly learn to paddle.

Armbands have their detractors. That is because children can become too dependent on them. So, we were mindful that we had to gradually reduce the amount of air in the water wings to let them find their own buoyancy. They are both now accomplished swimmers.

Central banks around the world will, similarly, need to reduce the amount of air in the global water wings. There is a chance that those with a vested interest in a continued supply of cheap money may thrash around uncontrollably. Some might even sink. But a return to normality should be a time for celebration.

Until that day of reality arrives, stock markets around the world are likely to continue rising – fuelled by the supply of cheap money. Currently, the total value of equities in 58 major stock markets of the world is a tad below the all-time high of $62.8 trillion in October 2007 – just before the financial crisis started.

Signs of a genius

Compared to its low of $29 trillion in February 2009, global stock markets have staged a remarkable recovery. Around that time, the Straits Times Index (SGX: ^ST) stood at 1,512 points. Today the Singapore benchmark index is double that. For me, it underlines the extraordinary resilience of global economies to recover, even after one of the worst financial disasters of our lifetime.

Those of us who continued invest in the face of financial Armageddon have been amply rewarded. However, there can be a temptation in a bull market to buy anything and everything, simply because they are going up. There is, as billionaire investor Seth Klarman, pointed out, a tendency to confuse genius with a bull market.

So over the next few weeks and month, take a good look at the stocks in your portfolio. Decide which of those shares was the work of a genius and which was thanks to the bull market. Knowing which is which could help make you a better investor.