Investing is a game of probabilities – there are no sure things. But there are some things that I am pretty certain will happen in 2019.
1. Individual stocks will be volatile, regardless of how the overall market does. After the painful fourth quarter of 2018, it’s probably hard to remember that 2017 was an incredibly calm year for the US stock market. For instance, the S&P 500’s maximum peak-to-trough loss (this is known as the maximum drawdown) in that year was just 2.8%. But in 2017, Amazon.com’s maximum drawdown was 11%, despite the company’s share price gaining 56% for the whole year. Volatility in stocks is a feature, not a bug.
2. The Federal Reserve will either raise, maintain, or drop benchmark interest rates in the US. You must be thinking, “Gee – thanks, Captain Obvious!” I write this for a reason. I understand that plenty of eyeballs are on the Fed’s interest rate moves, but the way we invest should not change based on what the US’s central bank is doing.
Singapore’s banking trio of DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) have all recently said that rising interest rates, up to a certain extent, are likely to be a net positive for them. But, all three have also managed to grow their businesses substantially over the past decade even when interest rates have declined. The quality of a company’s business and the growth opportunities that are present matters far more to the company’s share price than what the Fed is doing.
3. The US and China will call a truce, maintain status quo, or escalate their current trade squabbles. I can hear your thoughts: “Again, Captain Obvious!?” But bear with me, because I state this for another good reason. In his 1994 Berkshire Hathaway annual shareholders’ letter, Warren Buffett wrote one of my favourite investing passages:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
4. Many investors will feel an urgent need to make drastic changes to their investment portfolios for 2019 based on the volatility experienced in the second half of 2018. That’s a mistake, assuming that the portfolio built in 2018 was done so based on sound investing principles.
Behavioral economist Ofer Azar once studied the actions of more than 300 football goalkeepers during penalty kicks. Azar found that goalkeepers who jumped left successfully saved a penalty kick just 14.2% of the time, while those who jumped right had a success rate of a mere 12.6%. But, goalkeepers who stayed in the center of the goalmouth had a successful penalty-saving rate of 33.3%. What’s interesting though, is that only 6% of the 300-plus goalkeepers studied chose to remain in the center. Azar’s study highlights the presence of an action bias in us, where we think doing something is better than nothing.
Azar linked his football results to the financial markets, and discovered that this action bias also manifests strongly in investing – when markets become volatile, investors develop a strong urge to do something. But doing nothing is often the right thing to do. The statistics bear this out. Going back to Amazon, the company’s share price has gained an astonishing 3,000% over the past decade. But as the chart below shows, the company’s share price has routinely suffered maximum drawdowns of 30% or more in that period. An investor who succumbed to the urge to sell at the onset of volatility in Amazon’s share price would have lost out on massive gains.
Source: S&P Global Market Intelligence
Charlie Munger, the Robin to Buffett’s Batman, once said: “If you buy a few great companies, then you can sit on your ass. That’s a good thing.”
5. There will be something to worry about in the financial markets. The legendary investor Peter Lynch once said that “There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.”
6. There are 7.6 billion people in the world today, and the vast majority of them will wake up each morning wanting to improve the world and their lot in life. This motivation is what ultimately powers the growth of the global economy and financial markets. There will be idiots who will shake things up from time to time, but we should have some faith in the collective positivity of mankind. A bet on the stock market is a long-term view that we humans are always striving to improve our lives in aggregate.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing Chong Ser Jing owns shares in Amazon.com, Berkshire Hathaway (Class B), and Oversea-Chinese Banking Corporation. The Motley Fool Singapore has recommendations on Amazon.com, Berkshire Hathaway (Class B), DBS Group Holdings, United Overseas Bank, and Oversea-Chinese Banking Corporation.