The Best Advice For A New Investor

Credit: Simon Cunningham

In a recent live virtual chat event that my colleagues and I hosted for some readers of the Motley Fool Singapore, there was a participant who asked what the best advice is that we can give to new investors.

My response is that the best thing a new investor can do is to study market history. My US colleague Morgan Housel once wrote that “so much of doing well in the stock market comes down to knowing what to expect” – it is an appreciation of market history that can do just that.

But, market history is such a broad term. To help narrow the field, here are two things I find important.

1. Big long-term winners can be sickening short-term losers

Stocks such as Riverstone Holdings Limited (SGX: AP4) and Raffles Medical Group Ltd (SGX: BSL) have been huge long-term winners in Singapore’s market since the start of 2007. Their share prices have climbed by 565% and 424%, respectively.

The pair’s long-term returns are no mean feat. For perspective, the Straits Times Index (SGX: ^STI) had declined by 8% over the same timeframe. But, both Riverstone and Raffles Medical were actually vicious nightmares for investors over short time horizons in that period.

Here’s a chart showing the maximum peak-to-trough loss (known as drawdown) that the duo had experienced in each calendar year from 2007 to 2015:

Annual maximum peak-to-trough loss for Riverstone and Raffles Medical Group
Source: S&P Global Market Intelligence

To pick out some jarring episodes, Raffles Medical’s shares collapsed by 64% from peak-to-trough in 2008. Meanwhile, Riverstone’s drawdown in 2011 was a stunning 30%. And all these had occurred under the backdrop of their shares more than quintupling since the start of 2007.

When it comes to stocks, painful short-term declines are par for the course and shouldn’t be taken as a sign that anything is broken.

2. Patience is needed for results to occur

Stocks can go nowhere for years before rocketing. I know this from personal experience.

I had bought shares of computer and console games maker Activision Blizzard back in October 2010 at a price of US$11.31. For the next two-plus years after my purchase, the stock was languishing between US$11-US$13, basically doing nothing.

Activision Blizzard share price
Source: S&P Global Market Intelligence

But as the chart above shows, the company’s shares started climbing steadily somewhere in mid-2013. Today, I’m sitting on a handsome 234% gain. Great winners in the stock market can go for years without their stock price doing much; that’s why patience is really needed in investing.

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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 and Activision Blizzard.