Today’s the last day of 2015. It’s 8:20 am now. In less than 16 hours, we can welcome 2016. The start of a new year is a popular time for many to make resolutions to improve their lives. Some of you might be interested in making investing resolutions and so, I thought it’d be interesting and useful for you to share my own list. It consists of thoughts and knowledge I’ve picked up after being an active student of the investing game for more than a decade. But before I dive right into it, I’d like to share a few…
Today’s the last day of 2015. It’s 8:20 am now. In less than 16 hours, we can welcome 2016. The start of a new year is a popular time for many to make resolutions to improve their lives.
Some of you might be interested in making investing resolutions and so, I thought it’d be interesting and useful for you to share my own list. It consists of thoughts and knowledge I’ve picked up after being an active student of the investing game for more than a decade.
But before I dive right into it, I’d like to share a few words about my investing resolution. It’s not a list of things to do. Instead, it’s a list of things to not do.
Knowing what to avoid can be as important – if not even more important – than knowing what to do when it comes to investing. Here’s astronaut and engineer Chris Hadfield on the importance of negative thinking:
“Like most astronauts, I’m pretty sure that I can deal with what life throws at me because I’ve thought about what to do if things go wrong, as well as right. That’s the power of negative thinking.”
With that, here’re my investing resolutions for 2016 and beyond.
1. Don’t invest based on short-term stock market forecasts
The chart below, from my American colleague Morgan Housel, is a very good description of how useless short-term stock market forecasts are:
Source: Birinyi Associates, S&P Capital IQ (Morgan Housel)
Near the end of every year, market strategists in many financial institutions in the U.S. will come out with forecasts for where the S&P 500 (a broad U.S. market index) will be at the end of the next calendar year. The blue bars in the chart show the average forecast by the strategists for each year going back to 2000; the red bars show the actual performance of the S&P 500. Enough said.
2. Don’t mix investing with economics
There can be a massive gulf between economic trends and stock market performance. My favourite case in point is from the following tweet by investment manager Ben Carlson:
Have to imagine these numbers will reverse at some point for China pic.twitter.com/DgNdBil7uA
— Ben Carlson (@awealthofcs) November 11, 2014
China, with its mighty gross domestic product (GDP) growth over the 21 years ended 1993, has seen its stock market shrink. Meanwhile, Mexico’s stock market had been on a massive winning streak over the same period despite seeing anemic GDP growth.
Keep investing separate from economics.
3. Don’t invest in highly-valued stocks (unless convinced of their growth potential)
Paying for stocks with expensive valuations can be a recipe for disaster.
On 25 May 2015, timber-flooring specialist Jason Holdings Limited (SGX: 5I3) was priced at S$0.64 and valued at 330 times trailing earnings and 9.4 times its book value. Today, shares of Jason Holdings are exchanging hands at S$0.07 each. For those not counting, that’s an 89% decline in the stock.
Not every share with a high valuation is a bad investment. But it really pays to be careful.
4. Don’t time the market
Investing is all about buying low and selling high. But jumping in and out of stocks to catch every mini-peak or trough can result in a disastrous investing experience.
Source: John Maxfield, Fool.com
The chart above, from my colleague John Maxfield, shows the annualised returns for the average U.S. equity fund investor over rolling 20 year periods from 1998 (20 years ended 1998) to 2013. It also shows the same type of rolling 20 year returns for the S&P 500. As you can tell, the average fund investor has lost out to the market badly.
The reason? They had failed at trying to time the market, buying and selling their investments over short timeframes at all the wrong times.
5. Don’t anchor on past stock prices
An investor in shares of beleaguered commodities trader Noble Group Limited (SGX: N21) told The Business Times in April this year that the company’s stock price was “so depressed now, it’s no point (to sell).”
Well, there was a point to sell. Noble’s stock was trading at S$0.87 at the end of April when the company was earning US$0.016 per share in profit. Today, Noble’s stock is at S$0.40, down by more than half, with earnings per share of a negative US$0.011.
Stocks can always go lower if their businesses become rotten. Don’t anchor on past prices. Always reassess a stock’s future business prospects periodically. The aforementioned investor in Noble had plenty of time to sell Noble between April and today and preserve his capital or reinvest it in better opportunities. There is always a point in selling stocks if you think they have broken businesses.
What do you think of my list? Do you have any investing resolutions of your own? Please share your thoughts in the comments section below!
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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 company mentioned.