The 1 Thing About Investing That Even Great Investors Are Clueless About

Credit: Simon Cunningham

If you’ve ever studied the history of some of the greatest investors around, you’d likely realise that they have extremely diverse approaches to how they invest.

But, there’s one thing in common amongst them which not many may have realised: They often have no clue about what the “stock market” is going to do, especially over the short-term.

Being clueless about what the market’s doing

Take Warren Buffett, the Chairman of the Nebraska, U.S.-based conglomerate Berkshire Hathaway (Buffett took over the reins at Berkshire in 1965 and over the past 50 years, has grown Berkshire’s per-share book value at a phenomenal annual compounded rate of 19.4%). The following’s what he wrote in a 2008 op-ed for The New York Times:

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now.”

Next, let’s look at Peter Lynch (Lynch was the manager of the U.S.-based Fidelity Magellan mutual fund from 1977 to 1990 and in those 13 years, he led the fund to astonishing annual returns of 29%, turning every $1,000 invested with him into $27,000). This is Lynch musing about the stock market in an old interview with PBS:

“What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market. It’s on your side. And when stocks go down, if you’ve got the money, you don’t worry about it and you’re putting more in, you shouldn’t worry about it. You should worry what are stocks going to be 10 years from now, 20 years from now, 30 years from now.”

Then there’s also Sir John Templeton (Templeton set up the Templeton Growth Fund in 1954 and from then till his retirement in 1992, the fund had generated an eye-raising annual return of some 16%), who once said:

“I never ask if the market is going to go up or down because I don’t know, and, besides, it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest priced in relation to what I believe it’s worth?”

Consider too, David Gardner’s thoughts on the topic. David’s a co-founder of the Motley Fool and amongst his investing exploits are finding a 100-bagger (a stock with a 10,000% gain) in online retail giant in 1997 and being the adviser to two of the top three-ranking investment newsletters in the U.S. for the five-year period ended 30 June 2013. In a recent podcast, David said:

“[Where the market’s headed] are the most frequent questions that I get asked as a professional investor, myself, and a co-founder of The Motley Fool. People want to know where the market’s going. I’ve never known where the market’s going.”

I could go on. But you get the point.

“The Blind Forecaster”

Meanwhile, as my colleague Morgan Housel describes in his article The Blind Forecaster, there are people on Wall Street – the financial capital of the U.S. – whose job is mainly to forecast what the S&P 500 (a broad market index in the U.S. akin to the Straits Times Index (SGX: ^STI) we have here in Singapore) would do over the next 12 months.

These people, called strategists, are highly educated and intelligent, often with PhDs and CFAs – they’ve also been horribly wrong, as you can see in Morgan’s chart below:

S&P 500 forecasts

Source: Morgan Housel; (with data from Birinyi Associates and S&P Capital IQ)

In fact, the strategists are so far out of whack with reality that their forecasts “were off by an average of 14.7 percentage points per year,” according to Morgan’s article.

A better way forward

Great investors, like the ones profiled earlier, likely don’t pontificate about what the stock market’s going to do next because they know how hard it is to get things right (we’ve seen examples of this with the strategists’ collective track records).

Instead, they try to bet on something they know they have a better chance of getting right: Whether or not a stock’s cheaper than its intrinsic worth (which is determined by things like the company’s profits, cash flows, revenues, patents, assets, management teams, brand names etc.) and how the stock’s underlying business would change (for the better or worse) over the next three, five, 10, 20 years or more.

That’s what we should all do as investors too. Focus on individual businesses and their value, and what they might be able to accomplish in the far future.

Healthcare medical services provider Raffles Medical Group Ltd (SGX: R01) has returned 203% since 11 October 2007, the day the Straits Times Index closed at an all-time high of 3,876 points. Despite Singapore’s market barometer still being down by nearly 15% from its peak at its current level, Raffles Medical has become a winning share partly as a result of its consistent and solid business growth over the years (see chart below):

Chart 1 - Raffles Medical Group's growth in revenue, profit, and cashflow

Source: S&P Capital IQ

Even for investors who would like to stick to the broader market, it’s far better to think long-term and consider probabilities. Chart 2 below shows the annual returns for the S&P 500 against its starting valuation for a 1-year holding period for the years stretching from 1871 to 2013:

Chart 2 - Average annual returns of S&P 500 for 1 year holding period

Source: Robert Shiller; author’s calculations

The next chart you see – Chart 3 – shows you the annual returns for the S&P 500 against its starting valuation for a 10-year holding period over the same timeframe as above.

Chart 3 - Average annual returns of S&P 500 for 10 year holding period

Source: Robert Shiller; author’s calculations

While the earlier chart was essentially a coin flip (cheap stocks can just as easily lead to a bad return as a good return when the investing time horizon is short) the latter chart had showed a much clearer trend – buy stocks when they’re cheap, and you’re likely (note that it’s not a guarantee) to do okay over the long-term.

A Fool’s take

Even the best investors in the world can’t know what the stock market’s going to do over the short-term. So, quit fretting about the issue and concentrate on what’s more important instead: The long-term health and value of the stock market or the businesses you’re interested in.

For more investing analyses, insights, and important updates about Singapore's stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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, Amazon, and Raffles Medical Group.