I had recently shared seven surprising things about the investing world that I think every investor should know. These things come from my experience over the past three-plus years as a writer and analyst with the Motley Fool Singapore and over the past decade as a keen student of the investing game. Earlier today, a few more sprang to my mind. Here are the eighth, ninth, and 10th surprising things about investing. 8. Individual investors can remain remarkably calm even during market panics. It’s easy to imagine that the majority of individual investors are in a panic whenever the…
I had recently shared seven surprising things about the investing world that I think every investor should know. These things come from my experience over the past three-plus years as a writer and analyst with the Motley Fool Singapore and over the past decade as a keen student of the investing game.
Earlier today, a few more sprang to my mind. Here are the eighth, ninth, and 10th surprising things about investing.
8. Individual investors can remain remarkably calm even during market panics.
It’s easy to imagine that the majority of individual investors are in a panic whenever the market experiences a sharp decline. But, the real picture may look quite different. Steve Utkus from Vanguard, one of the world’s largest investment managers, explains:
“In the first eight trading days of August , including two of the most volatile days since 2008, just under 2% of 401(k) [a retirement savings plan in the U.S.] participants at Vanguard made a change to their portfolios. In other words, over 98% stayed the course. Ninety-eight percent took no action. Ninety-eight percent took the long-term view.
Now it’s true, if choppy markets continue, we’ll see this number inch down. Ninety-eight percent of participants staying the course might become 97%. In October 2008, during the depths of the financial crisis, it became 96%—in other words, 4% of participants made a move. But the fact remains: those trading are a very small subset of investors.”
In the context of picking up bargains during a market crash, it may be easier for us to invest if we can keep in mind what Uktus had shared, and that is, it’s not the majority of investors who are selling when prices are falling.
9. Companies in horrible, horrible industries can be wonderful, wonderful investments.
As an example of how bad the economics of the airline industry can be, here’s billionaire Warren Buffett with an apt quote:
“If a farsighted capitalist had been present at Kitty Hawk [the legendary place where the first powered airplane flights took place], he would have done his successors a huge favour by shooting Orville down.”
But here’s an extraordinary statistic. In the 30 years ended 2002, the best performing stock in the U.S. stock market was an airline, Southwest Airlines. The company had a staggering annual return of 25.99%. Sometimes, a gleaning diamond can still be found amongst a lump of coal for those with keen insight.
Now, it’s also important for investors to note that the reverse is also true: Companies in great industries can also be horrible investments. Case in point: Healthway Medical Corp Ltd (SGX: 5NG). The company’s a healthcare services provider and the healthcare industry’s often thought of as being defensive – people fall sick regardless of the state of the economy. But from the company’s listing in July 2008 to today, its shares have declined by 83% even after accounting for gains from reinvested dividends, according to data from S&P Global Market Intelligence.
A look at the company’s business results may show us just why its shares have performed so dreadfully. In 2008, the firm had profit of S$9.6 million with revenue of S$80.9 million. In 2015, Healthway Medical’s revenue had grown by a total of just 17% to S$94.3 million while its profit had shrank to a measly S$1.7 million.
10. The stock market may be easier to predict over the long-run than over the short-run.
This seemingly paradoxical idea can be neatly illustrated by the charts below:
The charts use data of the S&P 500 (a broad market index in the U.S.) from 1871 to 2013, so that’s more than 140 years of history we’re looking at. They plot the returns of the S&P 500 against its starting valuation for holding periods of 1 year and 10 years. With a holding period of 1 year, the stock market is essentially a coin-toss: Cheap shares can fall just as easily as they rise; it’s the same for expensive shares.
But when the holding period is extended to 10 years, a clear theme emerges: Buy stocks when they’re cheap and you’re more likely than not to do well; buy stocks when they have high valuations, and it’s likely you’d suffer.
Given such information, it’s hard for me to want to invest for the short-term. What do you think? 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 companies mentioned.