Our Investing Beliefs — Pt 1
Key Takeaways
Principles and values are a steadying force in life, and the same goes for investing. Establishing your investment philosophy can help steady you during market sell-offs or times of volatility.
Many investors lose faith in markets during slow recovery periods (like after the GFC). In those moments, your philosophy and a look at long term data can help you avoid making costly mistakes.
Markets spend 70% of the time going up, and will work in your favour as long as you stay patient and have a proper investment roadmap in front of you.
The stock market is the story of cycles and of the human behaviour that is responsible for the overreactions in both directions.
Before you set out to invest, establishing an investment philosophy is extremely important. Establishing your own set of beliefs and principles that guide your decision-making process will make you less likely to be swayed by your emotions and feelings when the stock or bond market is not performing to your expectations.
What are the decisions that need to made? For example, which asset class (stocks, bonds, cash, property or commodities) from your experience and historical data is most likely to provide you with the returns you require? What is your plan when markets go down by -20%? Does value investing appeal to you or is growth investing more of your style? Do you want to take country or regional bets, or do you prefer a more rounded globally diversified approach?
Setting these guidelines can steady you, so that you do not get swayed by the latest themes or hearsay. For instance, value investing is arguably on its worst long-term run in decades. However, if you believed in it in the first place, subscribed to the Ben Graham or Warren Buffett type of thinking, then you shouldn’t be wavering from that strategy and hopping onto the AI or tech bandwagon.
If you had already determined that stock market sell-offs are typically shorter lived, and understand that markets always recover to go on to new highs, then the bear market of 2022 would not have fazed you. In fact, it’s times like those that you’d be looking to invest more — whenever markets come down.
In this multi-part series, we want to reiterate some of our investing beliefs — beliefs that form the foundation of our investment philosophy, and form a part of process that we implement for you. These beliefs are backed by evidence, data, and peer-reviewed financial science borne from academia. As such, it does not represent our own personal opinions or predictions from the individuals on our investment committee. Opinions and predictions are often unverified and based on guesses.
1. Markets Work
If you occasionally feel a bit lost when investing and have doubts on whether stocks and bonds are still “working” — just remember; stock and bond markets have been around for centuries and are conduits for capital.
Stocks, contrary to the unfortunate behaviour of many, are not a gambling tool or a fast way to make money. They represent your share in a business. Imagine you are the owner of a cafe or a bookstore — it is unlikely you are going to operate the business for just a day or even a few months. If you are day trading, or have a holding period of a year or less for your stocks, then that is exactly what you are doing.
As bonds are essentially a business loan, the higher the bond yield, the riskier the business. So don’t go chasing after high yields unless you are comfortable owning businesses that could fold at any moment.
However, there are times when we get trapped in secular bear markets and do not make money for years. For instance, if you invested in 2007, you would only break even around 8 years later. During this long period is when investors start to lose hope.
The chart above also shows how $1 invested in global stocks has grown over the years — despite the many crises that we have seen and experienced along the way. In USD terms, $1 invested in 1970 is approximately $90 today. If you were a SGD investor, S$1 would be around S$40 today. So markets work — even though the world has gone through a lot of significant changes over the years.
And finally, if anyone says that “this time it’s different” — meaning that investors are in for a big regime change and that investments are expected to perform differently from the way they have in the past — stop and think again. Whilst we can always expect to hit turbulence in our investment journey (as you can see from the bear markets in the charts above), these episodes last for a shorter duration, and are of a smaller magnitude when compared to bull markets.
Empirical evidence shows that markets spend 70% of the time going up. The markets will work in your favour as long as you stay patient and have a proper investment roadmap in front of you. So whenever you feel that investing may not be working out for you, or start to doubt on the viability of a long-term investment, come back to this basic principle to reaffirm yourself that markets work.
If you want to find out more about whether investments are working in this new “high interest rate regime”, come and have a chat with us.
