Am I making a hyperbolic statement with the title of this article? I don’t think so, if the findings of a recent investor survey accurately reflect the mentality of investors in the stock market here.
Earlier today, the Business Times published an article titled “S’porean investors unrealistic about yield and risk: poll”. The article’s main discussion was on the findings of Eastspring Investments’ third annual investor behaviour survey. Here’re excerpts from the survey (emphasis mine):
“[Singapore investprs] are optimistic about domestic equities with very high expectations on yield (average of 17.9 per cent) but with a low risk tolerance across all asset classes, with more than 30 per cent unwilling to take more than a 3 per cent loss on invested capital. This contrasts with Hong Kong mutual fund investors in the survey who expect an average of 20 per cent yield on Hong Kong equities in the second half of 2015, but are willing on average to take a 10.1 per cent loss on capital.”
The italicized portion of the paragraph above is frightening. A huge number of the survey participants in Singapore are unwilling to sit through even a low single-digit loss in their portfolio – that’s a recipe for disaster in the stock market.
Why? That’s because stocks are incredibly volatile assets over the short-term. The chart below will be illustrative. It shows the Straits Times Index’s (SGX: ^STI) maximum drawdowns (largest peak-to-trough decline) in each calendar year from 1993 to 2014.
Source: S&P Capital IQ
Stocks in Singapore have proven to be very painful investments to hold for impatient investors with short time horizons: In the 22 calendar years profiled in the chart, 19 of them have seen a drawdown of more than 10%.
But interestingly, the Straits Times Index has also nearly doubled from 1,531 at the start of 1993 to 3,000 today. Plug in a 3% yield (which isn’t too ambitious), and Singapore stocks have generated an annual total return of around 6% since 1993 despite all that short-term pain. That’s not too shabby.
“Volatility scares enough people out of the market to generate superior returns for those who stay in,” Wharton finance professor Jeremy Siegel once said. Don’t be the scaredy-cat.
Now, some of you might be thinking: “Can’t those investors just find a great money manager who will not let their portfolio lose 3% or more?” Fat chance.
Bill Ruane and Charlie Munger are both phenomenal money managers. From 1970 to 1984, Ruane had turned every $1,000 invested with his fund into $7,753. That’s a nearly eight-fold jump in just 14 years. Munger’s even more impressive – in his relatively short 13 year career as a hedge fund manager from 1962 to 1975, every $1,000 entrusted to him at the start would have ballooned into $11,157 at the end. Here’s how they had performed in each year:
Source: Article titled “Superinvestors of Graham and Doddsville”
Notice the big negative years (emphasis on the plural) that both Ruane and Munger had? The point I’m trying to make here is that even the best money managers cannot prevent painful short-term losses for you if you want to invest in stocks. Periodic short-term declines are part and parcel of the game – it’s something we have to endure in order to generate satisfying long-term returns. (Remember Siegel’s quote earlier?)
David Swensen, the outstanding long-time manager of Yale University’s multi-billion endowment fund, revealed the following in a 2008 guest lecture:
- Investing research outfit Morningstar once did a study on the 10-year returns of 17 categories of equity mutual funds in the US (mutual funds there are analogous to unit trusts here).
- On average, investors in all 17 categories had underperformed the funds. The worst category saw a 13.4% per year underperformance!
- The reason for the phenomenon is that investors had been guilty of buying high and then selling low. Simply holding on would have resulted in a much better performance for the average investor.
The key takeaway from Swensen is that it’s not so much your money manager’s skill that determines your returns – it’s your behavior. The stock market is a volatile beast over the short-run. Help yourself by coming to terms with that. If not, you’d likely be doomed to fail.
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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 doesn't own shares in any companies mentioned.