22 Surprising And Important Things About Investing Every Investor Should Know

Last month, I shared 21 surprising and important things about the world of finance that I think every investor should know.

These things come from the years I’ve spent learning about investing (more than 10 years now) and being an analyst with The Motley Fool Singapore (over three years and counting!). Earlier today, a new thought bubbled up in my head. So, let’s jump into the 22nd entry of my ever-expanding list of surprising and important investing things:

22. An entire country’s stock market can go crazy

The stock market’s a great place to build long-term wealth. But when I bring that up, I sometimes get replies from people saying that Japan has been a horrible long-term disaster for investors.

That’s true.

At today’s level of 16,600 or so, Japan’s Nikkei 225 Index is still over 50% lower than where it was when it peaked in 1989, some 27 years ago.

But, there’s a crucial angle to the story that many miss – Japan’s stock market was insanely overvalued at its peak. Investor Mebane Faber had pointed that out a few years ago, showing how Japan’s stock market had a CAPE (cyclically-adjusted price-to-earnings) ratio of more than 90 at the peak. The CAPE ratio is calculated by dividing a stock’s price with its average inflation-adjusted earnings over the past 10 years.

For some context on Japan’s crazy CAPE ratio, Singapore’s Straits Times Index (SGX: ^STI) had an average Graham and Dodd PE of just 20.8 over the 30-year period stretching from December 1985 to December 2014. The Graham and Dodd PE is very similar to the CAPE; the only difference is that the former uses a 10-year-average earnings figure that is not adjusted for inflation.

So, as you can see, the entire Japanese stock market went crazy in the late 1980s, resulting in a disastrous return for investors even after nearly 30 years.

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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.