MENU

Afraid Of Uncertainty in the Economy and the Stock Market? Here’s Why You Shouldn’t Be

The Small and Middle Capitalisation Companies Association (SMCCA) is a body which aims to “provide a representative voice for Small and Mid-Cap Listed Companies” in Singapore. Yesterday, it released a report on its outlook for 2015 and noted: “Stock market to be lackluster in 2015 given the uncertain Singapore economic outlook.”

I had written an article earlier today on the SMCCA’s forecast, explaining why it’s useless for investors to equate future stock market returns with what the economy would do. I’d like to use the outlook again. But this time, I want to borrow it to point out an issue that seems to plague many investors – and that is, an unwillingness to invest due to uncertainties about the future.

Thing is, certainty is but a mirage – life is and always has been uncertain. Has anyone been able to guess the future? It’s only people’s feelings about the level of uncertainty which ebbs and flows with time. As Warren Buffett wrote in his 2012 Berkshire Hathaway annual shareholder’s letter (emphasis mine):

“A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful)…”

Consider the following chart, taken from an earlier article by my colleague Morgan Housel:

Chart of uncertainty

Source: Morgan Housel

Economists from Stanford and the University of Chicago measured the number of times “uncertainty” had appeared in 10 major newspapers and changes to the U.S. tax code. The chart you see above is a result of their handiwork.

Morgan astutely pointed the following in his article:

“But here’s what baffles me about this chart: Uncertainty bottomed — and thus, certainty about the future peaked — two distinct times in the last two decades:

  • In the months before the 9/11 terrorist attacks.
  • In the months before the financial crisis [of 2008/09] and bank bailouts.”

For me, that’s a great real-life example of how Buffett’s words have played out – “sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them.”

The chart also pointed out something interesting to me: Peaks in uncertainty have been great times to invest. Consider:

  • Uncertainty had reached a frenzied high in the early 2000s, likely after the 9/11 terrorist attacks and after the dot-com bubble had burst. What happened to stocks at the start of 2003? Over the next five years, Singapore’s market benchmark the Straits Times Index (SGX: ^STI) had gained some 160% by the start of 2008 whereas the S&P500 (a U.S. market barometer) had increased by 65%.
  • It was near the start of 2009 when uncertainty peaked again, after the financial crisis had wreaked havoc on the global economy. But, investors who bought the SPDR STI ETF (SGX: ES3) (an exchange-traded fund which tracks the Straits Times Index) at the start of 2009 would now be sitting upon total returns of 119%. Meanwhile, the S&P500 has done slightly better, having grown by 128%.

Uncertainty will always be around. But that shouldn’t stop you from investing and putting your capital to work. As Buffett once said, “If you wait for the robins, spring will be over.”

To learn more about investing and to keep up to date with the latest news about the stock market, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.