I’ve been learning about the markets and investing for 10 years, investing money for five, and writing for The Motley Fool Singapore for two-and-half years. Here’re seven thoughts I have developed over time on what works in investing (backed up by data and facts of course!). 1. You win by doing less The U.S.-based mutual fund (mutual funds in the U.S. are equivalent to unit trusts here) provider Fidelity once did an in-house study to find out who were its best-performing clients. Cue hilarity: The best-performing clients were the ones who forgot they had an account. Dormant, untouched accounts with…
I’ve been learning about the markets and investing for 10 years, investing money for five, and writing for The Motley Fool Singapore for two-and-half years.
Here’re seven thoughts I have developed over time on what works in investing (backed up by data and facts of course!).
1. You win by doing less
The U.S.-based mutual fund (mutual funds in the U.S. are equivalent to unit trusts here) provider Fidelity once did an in-house study to find out who were its best-performing clients. Cue hilarity: The best-performing clients were the ones who forgot they had an account.
Dormant, untouched accounts with a bunch of holdings that were left there for years and decades trounced accounts that were busily engaged with buying and selling. Less is more.
2. You win by doing less
In 1981, the investment manager with the best decade-long track record in the U.S.A was an unknown person named Edgerton Welch. When a small U.S. paper interviewed him on his methods a year earlier in 1980, this is what they found:
- He’d buy a share only if it’s rated as “1” by Value Line (Value Line is an investing newsletter that rates stocks on their cheapness; stocks with a rating of 1 are considered to be the cheapest) and is also highly recommended by two other brokerages.
- He sold when any of them changed their ratings.
It was as simple as that. Nothing fancy. No computers were needed and no star-gazing at charts were required. Less is more.
3. You win by doing less
Finance professors Brad Barber and Terrence Odean published a study in 2000 after looking at the trading records of more than 66,465 households in the USA for a five year period from 1991 to 1996. What they found was stunning: the 20% of households that traded the most had underperformed the market by 6.5% annually on average.
6.5% compounded over a lifetime can mean a world of difference to one’s retirement. Again, less is more.
4. You win by doing less
I’ve met my share of investors who actively dive into the most complicated business models and investing theses in their attempt to make money in the market. But, let’s hear what billionaire investor Warren Buffett has to say about this:
“But the interesting thing about business, it’s not like the Olympics. In the Olympics, you know, if you do some dive off the – on a high board and have four of five twists – on the way down, and you go in the water a little bad, there’s a degree of difficulty factor. So you’ll get more points than some guy that just does a little headfirst dive in perfectly.
So the degree of difficulty counts in the Olympics. It doesn’t count in business. Now, you don’t get any extra points for the fact that something’s very hard to do. So you might as well just step over one-foot bars instead of trying to jump over seven-foot bars.”
The former has four engineering business segments – Aerospace, Electronics, Land Systems, and Marine – and each has their own market dynamics to consider. Here’s a taste of how the company describes its Electronics segment:
“[W]e offer wired and wireless communication solutions, rail and traffic management systems, real-time C4I (command, control, communication, computing and intelligence) solutions, modelling and training simulation, intelligent building management systems, homeland security solutions and managed services.”
Investors might also require specialised engineering knowledge in order to gain an upper-hand in figuring out the company’s competitive advantages, if any.
Meanwhile, Super Group makes and sells instant coffee and the ingredients that go into making instant coffee. Over the past five years, Singapore Technologies’ shares are up by a mere 3% while Super Group’s shares have gained nearly 150% in price. Less can be more.
5. You win by doing less
I’ve also come across investors who think they can outsmart the market by trying to time their entries and exits from stocks. History has shown that most fail in doing so.
Source: John Maxfield, Fool.com
The chart here is compiled by my colleague John Maxfield using data provided by investment research outfit DALBAR. And as you can see, the average mutual fund investor in the U.S. has dramatically underperformed the S&P 500 (a US market index) in the 20 years ended 1998, 20 years ended 1999, and so on.
Unsuccessful market timing was pegged by DALBAR as a big reason for investors’ poor returns. They’d have been way better off if they had bought and held their investments. So again, less is more.
6. You win by doing less
My colleague Morgan Housel has some great advice on how the average individual investor like you and me can outsmart even the smartest minds in the business:
“Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of “The Lighting Round.”
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.”
Again, less is more.
7. You win by…. Okay I should stop here. I could go on. But I think you’ve gotten the point. If there’s only one thing you remember from this article one year from now, make it this: In investing, less really is more. You win by doing less. Less buying and selling. Less market-timing. Less complexity.
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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 Super Group.