Real Investing Lessons from an April Fools’ Day Joke

Happy (Belated) April Fools’ Day!

Yesterday (which was April Fools’), we at the Motley Fool Singapore posted an article titled “The MOST Exciting News You’ll Read Today… Or Not.” Some wise Foolish readers may have caught on to our joke, but the article was actually a prank we had pulled to celebrate a special occasion for our company – April Fools’ Day.

Rest assured that the Fool is committed to long-term investing (and not short-term investing as the article suggests) and will be studying businesses for decades to come.

But as the saying goes, “There’s a truth behind every joke,” there are indeed a couple of lessons to be gleaned from our April Fools’ prank.

Put away those dance shoes

It is unlikely that dancing in and out of the stock market will work. Tap dancing doesn’t either.

Thing is, the Foolish investors’ best chance to earn a decent return may be through holding shares for the long-term.

As my US-based colleague Morgan Housel points out below, the odds of obtaining a positive return on the S&P 500 (a US stock market barometer akin to the Straits Times Index (SGX: ^STI) we have here in Singapore) increases the longer you hold onto it:

 S&P500 long-term returns

At the local front, my local colleague Ser Jing had also once looked at more than two decades worth of data on the Straits Times Index and concluded that:

“A deeper look into the data also revealed that the 10 days with the best daily returns for the index were responsible for almost the entire bulk of its returns. Between 1 May 1992 and 18 December 2013 (the timespan I had tracked), the Straits Times Index had earned an average of 3.48% per annum; if an investor had missed those 10 best days, his returns would become almost non-existent at 0.12%.”

Do note that we haven’t even factored in the costs related to frequent trading. It is likely that trading costs would have wiped out whatever return that is left from missing the Straits Times Index’s 10 best days.

Tuning out the noise

Singapore's annual GDP growth rate and the Straits Times Index's yearly return

Source: World Bank (for GDP figures); S&P Capital IQ

The chart just above – which was used in the April Fools’ Day article –  is actually valid and brings about an important lesson: The annual GDP of Singapore typically does not dictate the direction of the stock market’s returns.

This brings me to a 2012 study from Vanguard which looked at how well certain well-known U.S. economic and financial indicators fared when it comes to predicting how the country’s stocks would do 10 years later.

The results of Vanguard’s study is shown in the chart below:

Economic variables and future stock market returns

Source: Vanguard

The sharp-eyed Foolish reader would have noticed that GDP actually ranks lower than the placebo “rainfall” (the inspiration for part of the April Fools’ joke) as a predictor of future stock market returns.

What Vanguard’s chart is trying to tell us is simple: The Foolish investor may be better off tuning out the noise from the financial media and instead, focus on the business behind the ticker.

Foolish summary

I hope that the April Fools’ joke we made yesterday had brought some smiles to you, faithful readers of the Motley Fool Singapore.

If there were groans, we’re sorry for the wildly dodgy information that came along with it (hint: the source of the dodgy graph was marked “Author’s imagination”).

To learn more about Foolish long-term investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeAlso, 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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.