4 Surprising Things About Investing Every Investor Should Know

I’ve been a student of the investing game for more than a decade now and have been writing about finance and the stock market for the Motley Fool Singapore for more than three years.

Here are some surprising things about the investing world I’ve discovered that I think every investor should know.

1. You can have a horrible investing performance and still have hundreds of millions of dollars to manage.

The Hussman Strategic Growth Fund run by John Hussman is a great example. Over the 10 years ended 1 March 2016, the fund has lost 3.44% per year, according to data from Morningstar. Yet, the fund still has US$683 million in assets under management.

2. Stocks with great long-term returns can be really agonising investments over the short-term.

The experience of stocks like Riverstone Holdings Limited (SGX: AP4) and Raffles Medical Group Ltd (SGX: R01) can be instructive. The two companies have been great winners in the local stock market since the start of 2007 as you can see in the following table:

Riverstone and Raffles Medical share price gains table
Source: S&P Global Market Intelligence

But, they’ve not given their investors a smooth ride at all over those years.

Chart 1 - Annual maximum peak-to-trough loss for Riverstone and Raffles Medical from 2007 to 2015
Source: S&P Global Market Intelligence

The chart just above illustrates the maximum peak-to-trough loss (known as the maximum drawdown) that each stock had suffered in each calendar year from 2007 to 2015. As you can tell, double-digit maximum drawdowns are a common sight.

3. Seemingly small fees you pay for your unit trusts or mutual funds can have a massive difference to the ending sums of your investments.

A $10,000 investment that grows at 10% annually will become slightly more than $108,000 after 25 years assuming there are no costs involved. The same investment, growing at the same rate but with annual fees of just 0.99% deducted, will become less than $75,000 after 25 years.

Pay attention to the fees you’re paying for your investments.

4. How magical compounding can really be.

Warren Buffett was born in 1930, which makes him 86 years old this year. In 1956, at the age of 26, he started investing money on his own professionally. It’s been a wonderful career as he has a net worth of more than US$60 billion today. But, do you know that 99.5% of his current US$66 billion net worth had come after his 50th birthday?

This reminds me of an old Indian legend. A king once challenged a sage to a game of chess and offered to let the sage choose his own reward. The sage’s request sounded simple. He wanted rice. But what amount of rice? The sage described it in this manner: Place one grain of rice on the first square of the chess board and double it on the second square. The third square would be double the amount of rice on the second square and so forth. There are 64 squares on the chessboard in total.

When the sage eventually beat the king at chess, the king, to honour his promise, brought a bag of rice and started filing out the chess board. But the king soon realised there was no way he was going to be able to do it: To fill up the last square of the chessboard in the manner would require way more rice than what is available on the entire plant (1.84 x 1019 grains of rice!).

Albert Einstein was believed to have said that “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Never belittle the effects of compounding when it comes to building wealth.

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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.