Earlier this month, I had shared 19 surprising and important things about the investing world that I think every investor should know. These things come from my experience over the years as a writer and analyst with the Motley Fool Singapore (that would be over three years) and a keen student of the investing game (that would be more than 10). As I was having lunch today, two more of these things jumped into my head. So, let’s take a look at the 20th and 21st entries in my ever-expanding list: 20. Some of the best investors in the…
Earlier this month, I had shared 19 surprising and important things about the investing world that I think every investor should know.
These things come from my experience over the years as a writer and analyst with the Motley Fool Singapore (that would be over three years) and a keen student of the investing game (that would be more than 10). As I was having lunch today, two more of these things jumped into my head. So, let’s take a look at the 20th and 21st entries in my ever-expanding list:
20. Some of the best investors in the world don’t know what the stock market would do over the short-term.
Peter Lynch and Warren Buffett would belong to any “Greatest Investors” list by virtue of their track record.
Lynch was the manager of the Fidelity Magellan mutual fund in the U.S. from 1977 to 1990; in his 13 years with the fund, Lynch had delivered stunning annualised returns of 29%. As for Buffett, he has been running Berkshire Hathaway since 1965 and in the 50 years through 2015, he has helped grow the company’s book value per share by an incredible 19.2% per year largely by using the firm’s capital to invest in stocks and acquire other companies.
In an old interview with PBS, Lynch said the following:
“What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market. It’s on your side. And when stocks go down, if you’ve got the money, you don’t worry about it and you’re putting more in, you shouldn’t worry about it. You should worry what are stocks going to be 10 years from now, 20 years from now, 30 years from now.”
In 2008, Buffett had penned an article for The New York Times which contained the following words:
“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now.”
Given Lynch’s and Buffett’s accomplishments, it might be easy to imagine that they’d be great at predicting what the stock market’s going to do over the short-tern. But as those quotes above clearly show, that’s not true – they have no idea what path stocks will take in the short run.
This is crucial to know for investors as it shows that one can still achieve great long-term investing results despite having an inability to predict the market’s short-term actions.
On a related note, it’s worth noting that even companies with solid long-term growth in their business and stock price can experience remarkable stock price volatility over short time periods. The quartet of Raffles Medical Group Ltd (SGX: R01), Vicom Limited (SGX: V01), Straco Corporation Ltd (SGX: S85), and Riverstone Holdings Limited (SGX: AP4) are great examples.
From the start of 2007 to today, their shares have appreciated by 422%, 396%, 554%, and 631% in price alone, respectively. Meanwhile, the four have also had strong and consistent earnings growth from 2007 to 2015 as you can see in the chart below:
Source: S&P Global Market Intelligence
In the following chart, you can observe the maximum peak-to-trough loss that each stock has suffered in each calendar year from 2007 to 2015:
Source: S&P Global Market Intelligence
Despite enjoying steady growth in profit, it has been normal for the quartet to see their stock prices suffer an annual maximum fall in the double-digit percentages in the years under study.
21. Those who try to guess what the market is doing over the short-term can miss by a million miles.
In The Blind Forecaster, my colleague Morgan Housel wrote:
“There are 22 “chief market strategists” at Wall Street’s biggest banks and investment firms…
…One of their most important — and certainly highest-profile — jobs is forecasting what the stock market will do over the next year. Strategists do this every January by predicting where the S&P 500 [a U.S. stock market barometer] will close on Dec. 31.
You won’t be shocked to learn their track record isn’t perfect. But you might be surprised at how disastrously bad it is.”
To show how horrible the record is, Morgan had prepared a chart illustrating the average forecast in each year from 2000 to 2014 as well as the S&P 500’s actual performance for the period. Here it is:
Source: Morgan Housel; Fool.com (with data from Birinyi Associates and S&P Capital Global Market Intelligence)
The blue bars are the forecast while the red bars are the S&P 500’s actual returns. As you can see, the performance of the strategists have been really bad. In fact, it’s so bad that the forecasts “were off by an average of 14.7 percentage points per year,” according to Morgan.
It’s not easy to predict the market’s short-term movements. Folks like Buffett and Lynch can’t do it, as we’ve seen. And, those who tried have had eggs on their faces. That’s worth keeping in mind whenever you’re tempted to make short-term trades.
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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 Berkshire Hathaway, Raffles Medical Group, Vicom, and Straco Corporation.