In today?s investing climate, it?s common to hear the following question: ?How would oil prices/ China?s economic slowdown/ the movement of interest rates/ money printing by central banks/ insert-your-favourite-topic affect the stock market??
I?ve been asked such questions a number of times myself. But each time my response?s the same: ?I don?t know. And I don?t think you should try to know either.?
Thing is, such a question is something you should really stay away from in investing. Why? I?d let Charlie Munger answer this. In the recent Berkshire Hathaway Annual Shareholder?s Meeting, he said:
?The trouble with making all of…
In today’s investing climate, it’s common to hear the following question: “How would oil prices/ China’s economic slowdown/ the movement of interest rates/ money printing by central banks/ insert-your-favourite-topic affect the stock market?”
I’ve been asked such questions a number of times myself. But each time my response’s the same: “I don’t know. And I don’t think you should try to know either.”
Thing is, such a question is something you should really stay away from in investing. Why? I’d let Charlie Munger answer this. In the recent Berkshire Hathaway Annual Shareholder’s Meeting, he said:
“The trouble with making all of these economic pronouncements is that people get to thinking they know something.”
It can be dangerous to try and analyse macro-economic conditions and then invest based upon such analysis. It’s a lot easier to get those calls wrong than you might imagine and when that happens, you can end up with a poor investing result.
To that point, Allan Roth from the Wall Street Journal recently wrote:
“Going in 2014, 45 of the 46 economists surveyed by The Wall Street journal forecasted higher interest rates for the year, and the 46th predicted rates to be flat. Yet the 10-year bond yield plunged from 3.04% to 2.17%.
Investors who moved from bonds to cash because of that widespread expectation [of rising rates] lost out on a lot of potential income.”
Rather than depend on making macro-calls to invest, investors might be better-served by focusing on the fundamentals of a business and then investing accordingly.
Over the decade ended 2014, companies like Vicom Ltd (SGX: V01) and Raffles Medical Group Ltd (SGX: R01) saw their earnings soar by 293% and 613% respectively while generating superior average returns on equity of 22.2% and 15.6%. Such strong economic performances did not go unnoticed by the market as Vicom and Raffles Medical’s shares have gained 616% and 1,055% in price, respectively, from the start of 2004 to today.
Meanwhile, a firm like Neptune Orient Lines Ltd (SGX: N03) had generated an appalling average return on equity of 6.1% over the 10 years from 2004 to 2014; over the same time frame, its earnings had also collapsed from US$942 million to –US$260 million. With such a dreadful business performance, Neptune Orient Lines’ shares have sunk from S$2.16 at the start of 2004 to S$1.04 today.
It’s interesting to go back in time, like we did, and observe how the businesses and share prices of Vicom, Raffles Medical, and Neptune Orient Lines had changed.
All three firms of course exist in the same universe and are affected by all the same macro-economic forces and geopolitical changes that had shaped our world over the past decade. But, their share prices had taken such different paths mainly due to the gulf in the performance of their businesses.
It’s a lot easier, relatively speaking, to get decisions about the eventual fate of a business – and by extension its share price – right than it is to make guesses about what the economy or other macro-indicators are going to do.
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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, Vicom, and Raffles Medical Group.