It appears to me that most investors are often on the lookout for winners. But, that may be the wrong focus, especially for newer investors. Here’s economist Erik Falkenstein explaining: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.” In keeping with the spirit of Falkenstein’s thinking, here are four big blunders for investors to avoid. 1. Not realising how common volatility is Stocks like Riverstone Holdings Limited (SGX: AP4) and Raffles Medical…
It appears to me that most investors are often on the lookout for winners. But, that may be the wrong focus, especially for newer investors. Here’s economist Erik Falkenstein explaining:
“In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”
In keeping with the spirit of Falkenstein’s thinking, here are four big blunders for investors to avoid.
1. Not realising how common volatility is
Stocks like Riverstone Holdings Limited (SGX: AP4) and Raffles Medical Group Ltd (SGX: R01) have been some of our local stock market’s biggest winners over the past nine years since the start of 2007.
|Company||Share price gains: 1 Jan 2007 to 31 Jan 2016|
Source: S&P Capital IQ
But along the way, their shares have been very volatile.
Chart 1 above shows the largest peak-to-trough losses that both companies have suffered in each calendar year from 2007 to 2015. As you can see, double-digit declines were simply par for the course for both Riverstone and Raffles Medical.
Volatility is a common thing in the stock market. It does not necessarily mean that anything is broken.
2. Mixing investing with economics
Economic trends and investing results can at times be worlds apart. Cigarette consumption in the U.S. had shrank by nearly half from 640 billion sticks in 1981 to 360 billion in 2007. Official statistics are no longer available after 2007, but the downtrend of cigarette consumption in the U.S. is likely to have continued since then.
But interestingly, the U.S.-based cigarette maker Altria had seen its shares gain 175% in price alone since its international operations were spun-off on 28 March 2008. This compares against the mere 47% return that the S&P 500 (a U.S. stock market index) had enjoyed over the same period.
3. Anchoring on past stock prices
Thinking that a stock will return to a particular price just because it had once been there can be a terrible mistake to make. In a 2014 report prepared by J.P. Morgan, 40% of all stocks in the Russell 3000 index in the U.S. from 1980 to 2014 had suffered a permanent decline of 70% or more from their peak values.
I had done a similar study recently too. On 15 January 2016, there were 813 equity listings in Singapore and on that day, I tried to determine the number of stocks from that group that had met both the following criteria:
- Is down by at least 50% from its all-time high
- Its all-time high had occurred before 1 January 2010
What I found was that 41% of my universe of stocks had both characteristics. Given that the stocks’ all-time highs had happened more than six years ago, it’s likely that the losses of many of those in the 41% group are permanent.
Simply put, there are stocks that fall hard – and then stay there.
4. Assuming that blue chip stocks are safe
In Singapore’s stock market parlance, the term ‘blue chips’ is used to refer to the 30 components of the Straits Times Index (SGX: ^STI). It also carries a positive connotation. But, a stock need not necessarily be a safe investment just because it’s a blue chip.
The current version of the Straits Times Index was launched on 10 January 2008 after a revamp. Companies like Cosco Corporation (Singapore) Limited (SGX: F83) and Noble Group Limited (SGX: N21) were part of index back then during the launch.
|Company||Total returns (including reinvested dividends) from 10 Jan 2008 to 31 Jan 2016|
Source: S&P Capital IQ
The table above shows their returns since 10 January 2008. As you can tell, they have been anything but great investments. It’s worth noting that their business results have been horrible over that period of time depicted in the returns-table; this is shown below:
|Company||Profit change from 2008 to last 12 months|
|Cosco||S$303 million to –S$99 million|
|Noble||US$577 million to –US$46 million|
Source: S&P Capital IQ
At the end of the day, it’s the business’s performance which matter – not a company’s blue chip status.
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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 Raffles Medical Group.