The American author Mark Twain, who was born in 1835, once wrote that “History doesn’t repeat itself, but it does rhyme.” I’m guessing that he would not have imagined that those particular words of his would wind up being one of the most apt quotes to describe what investing is all about even till today. An understanding of financial history is incredibly important because it gives us the basis to put into perspective what the share market, and what investing, has looked like. For instance, the share market in the USA has suffered a 10% correction almost once…
The American author Mark Twain, who was born in 1835, once wrote that “History doesn’t repeat itself, but it does rhyme.” I’m guessing that he would not have imagined that those particular words of his would wind up being one of the most apt quotes to describe what investing is all about even till today.
An understanding of financial history is incredibly important because it gives us the basis to put into perspective what the share market, and what investing, has looked like.
For instance, the share market in the USA has suffered a 10% correction almost once a year on average going all the way back to 1928; but, that has occurred in the backdrop of the share market there turning every $100 investment in 1928 into $255,553 by 2013. Without knowing that market declines of 10% are as common as your birthday, Christmas, or Chinese New Year, it’s easy to throw in the towel and panic when the markets do fall by 10% from a recent peak.
So, given the importance of understanding financial history, here’s one of my favourite broad takeaways from my American colleague Morgan Housel after he peered at more than a 100 years’ worth of market data in the USA (emphasis his):
“After booms come busts, and after busts come booms. That’s how markets work.”
Here’s a table from Morgan showing the rough idea of market cyclicality at work (and perhaps giving some optimism for what the US markets might look like by 2020 – but I digress).
|Period||S&P 500 Return|
*As of 23 Dec 2010
I’m guessing all the above might elicit the following question: What about Singapore’s share market? The only reliable data-set I have to work with regarding the Straits Times Index (SGX: ^STI) only goes back to 1988 so that’s barely 26 years of history – it’s a long time, but not nearly long enough.
In any case, here goes:
|Period||Straits Times Index Return|
*As of 15 July 2014
Source: Yahoo! Finance
On a very rough scale, it seems that there’s some semblance of the boom-bust relationship at play here. Given that there are four more years to complete the decade of 2008-2018, does this mean that investors in Singapore’s shares today are in for some pain in the future?
Not so fast. Looking at Morgan’s viewpoint regarding how the markets work, another key takeaway would be that “the single most important variable in determining future returns is the starting price.” On that front, valuations are incredibly important.
With the Straits Times Index valued at around 13 times trailing earnings at its current level of 3,302 points (the long-term average price earnings ratio for the index between 1993 and 2012 was at 16.6), “it can hardly be described as overpriced”, as my colleague David Kuo recently wrote. And to be clear, I’m not making any predictions or attempting to forecast anything – I’m just letting history be a guide.
But in any case, it’s important to also be clear that things do change and that looking only at the rear view mirror is an incredibly dangerous way to invest. After all, like what the Danish philosopher Søren Kierkegaard once wrote, “Life can only be understood backwards; but it must be lived forwards.”
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