A friend of mine and his colleague recently approached me to give an online presentation. My friend works in a financial advisory organisation and he wanted me to share my thoughts on how people generally think about investing and how could he and his colleagues explain long-term investing in a convincing manner. The presentation took place on 7 September 2020.
I prepared a speech and slide-deck for the session. They are meant to be viewed together. You can download the slide deck here. The speech is found below.
Hello all! Good afternoon, thanks for having me. Before I begin, I would like to thank Sam and Maxxell for inviting me to speak to everyone who’s gathered here.
Max is my friend, and he wanted me to touch on two things today: The mentality of individual investors and how to explain investing convincingly. So I’m going to be talking about these things today, specifically in relation to the stock market, because this is where I think I have some knowledge in. For this session, I will be presenting for 30 minutes, and then we can have the next 30 minutes for Q&A.
[Slide 2]
I need to share a disclaimer too. Everything I say here today should not be seen as a recommendation of any stock or investment product, nor should they be seen as a solicitation for the purchase of any stock or investment product. What I say should also not be taken as financial or investment advice.
Introduction
[Slides 3 to 4]
With this, a quick introduction of myself before I dive into the presentation. I was with The Motley Fool Singapore, an online investment advisory portal, for nearly seven years from January 2013 to October 2019. My role was to conduct research on the stock market and individual stocks, and communicate them to readers of Fool Singapore’s website, so I have a lot of experience interacting with men-on-the-street types of investors. I was a co-leader of the investment team at Fool Singapore and recommended stocks for subscribers to the company’s online investment newsletters.
One of my proudest achievements with the company was to help its flagship investment newsletter, Stock Advisor Gold, beat the market soundly. Stock Advisor Gold was launched in May 2016 and we recommended two stocks per month, one from Singapore, and one from international markets, including the US, UK, Malaysia, and Hong Kong. We measure the return of our recommendations by taking an average of the performance of each stock we recommend; at the same time, we also track the performance of a global stock market index. The newsletter nearly doubled the global stock market’s return over a 3.5 year period as you can see.
Today, I run an investing blog called The Good Investors together with my long-time friend, Jeremy Chia. The Good Investors is our personal investing blog, where we share our investing thoughts freely. I will be sharing this presentation deck on the blog, so you can refer to it later. Jeremy and I also run an investment fund named Compounder Fund, which invests in stocks around the world for the long run. Compounder Fund was launched in May this year and started investing in mid-July. Its mission is to “Grow Your Wealth and Enrich Society” and Jeremy and myself see it as more than just a business – it’s a platform for us to do good.
With the introduction over, let’s dig into the meat of today’s presentation: How individual investors think about stock market investing and how to explain investing in a convincing way. What I want to do is to contrast six investing “beliefs” I commonly come across with actual real world data. And by me doing so, I think you’ll gain a better appreciation for how to better describe stock market investing to your clients.
“Belief” No.1: The economy’s bad (good), so stocks must do poorly (really well)
[Slides 5 to 8]
Throughout my career, one of the most common things I’ve heard from investors is to link the economy with the stock market. If the economy’s surging, stocks should be doing well, and if the economy’s faring poorly, stocks should be doing badly. But real-world data show that this is often not the case.
For instance, we can look at the Panic of 1907 which was a period of severe economic contraction in the USA. It does not seem to be widely remembered today, but it had a huge impact and was in fact one of the key motivations behind the US government’s decision to set up the Federal Reserve (the USA’s central bank) in 1913. For perspective of how tough the Panic of 1907 was, when 1908 started, business volumes in many industries fell by 72% from a year ago; by the middle of 1908, business volumes had recovered to just 50% of what they were in 1907.
Now let’s look at how the US stock market did from 1907 to 1917. US stocks fell for most of 1907. They bottomed in November 1907 after a 32% decline from January. But they then started climbing rapidly in December 1907 and throughout 1908 – and the US stock market never looked back for the next nine years. Earlier, I described the horrible economic conditions in the country for most of 1908. Yes, there was an improvement as the year progressed, but economic output toward the end of 1908 was still significantly lower than in 1907. So this is one great example of why stocks and the economy are not the same things.
I have two more examples. First, you can refer to this chart on the disparity between the stock market returns and economic growth for China and Mexico from 1992 to 2013. Despite stunning 15% annual GDP growth in that period for China, Chinese stocks actually fell by 2% per year. Mexico on the other hand, saw its stocks gain 18% annually, despite its economy growing at a pedestrian rate of just 2% per year. Second, in the second quarter of 2020, US GDP fell by over 9% from a year ago. But some of the US stock market’s largest companies actually experienced revenue growth. For instance, Amazon grew its revenue by an amazing 40%, while Apple, Facebook, and Microsoft each posted low-teens revenue growth.
So when we’re looking at the stock market, I think it’s important to focus on stocks and not the economy. They are not the same things.
“Belief” No.2: There’s so much uncertainty now, let’s invest later
[Slides 9 to 13]
Another common thing I’ve heard individual investors say over the years is that “There’s so much uncertainty now, I prefer to wait for the dust to settle before I invest.” Today, with COVID-19 as a backdrop, this sentiment is likely to be even stronger than before.
But let’s imagine that sometime in the future, there’s one single year in which the price of oil will spike, the US will go to war in the Middle East, and the US economy will experience a recession. How do you think the US stock market will fare over the next five years or the next 30 years after this particular horrendous year? Take a second to think about your answer and remember it.
The events I mentioned all happened in 1990. The price of oil spiked in August 1990, the same month that the US went into an actual war in the Middle East. In July 1990, the US entered a recession. But from the start of 1990 to 1995, the S&P 500 was up by nearly 80%, including dividends and after inflation. From the start of 1990 to the end of 2019, US stocks were up by nearly 800%. What’s really fascinating is that the world has actually seen multiple crises in every single year from 1990 to today as shown in the table, which is constructed partially with data from finance writer and venture capitalist, Morgan Housel – uncertainty was always around, but that has not stopped US stocks from rising over time.
“Belief” No.3: What goes up, must come down
[Slides 14 to 15]
“What goes up must come down” is also one of the common things about the stock market that I’ve heard investors say. But the historical evidence shows otherwise.
This chart from Credit Suisse shows the returns of stocks from developed economies as well as developing economies from 1990 to 2013 – this is more than 110 years. In this timeframe, stocks in developed economies (the blue line) have produced an annual return of 8.3% while stocks in developing economies (the red line) have generated a return of 7.4% per year. There are clearly bumps along the way, but the real long run trend is crystal clear. For perspective, an annual return of 8.3% for 113 years turns $1,000 into nearly $8.2 million.
So what goes up, does not necessarily have to come down permanently – when it comes to the stock. But there is an important caveat to note here: Diversification is crucial. Single stocks, or stocks from a single country can face catastrophic, near-permanent losses for various reasons. Devastation from war or natural disasters. Corrupt or useless leaders. Incredible overvaluation at the starting point. These are some of factors that can cause single stocks or stocks from a single country to do poorly even after decades. By diversifying, we lower our risk.
“Belief” No.4: It’s risky to invest in stocks for the long run
[Slide 16]
The fourth “belief” I want to highlight is the commonly-held idea that it’s risky to invest in stocks for the long run. What the data shows is the complete opposite: The longer you hold your stocks (assuming you have a diversified portfolio of stocks), the lower your chances are of losing money.
The chart I’m showing now comes from Morgan Housel. Morgan once studied the S&P 500’s data for the years stretching from 1871 to 2012 and found that if you hold stocks for two months, you have a 60% chance of making a profit. If you hold stocks for a year, you have a 68% chance of earning a positive return. If your holding period becomes 20 years, then there’s a 100% chance of making a gain.
So instead of it being risky to hold your stocks for the long run, the reverse is true – the longer your holding period, the less risky investing in stocks becomes.
“Belief” No.5: Stocks are so risky because they move up and down so much!
[Slides 17 to 20]
There are also investors who believe that stocks are really risky financial products because they move up and down violently over the short run. But it’s all a matter of perspective. To explain further, I want to play a quick game with all of you. I will introduce two companies – both are real companies – and I want to ask you to think about which of the two you will like to own.
The first company has been a nightmare for investors. From 1995 to 2015, it has fallen by 50% or more on four separate occasions. It has also declined by over 66% twice. The chart you see, from a Motley Fool article by Morgan Housel, shows when and by how much the company’s share price was below its high from the previous two years.
The second company has been a dream for investors. From 1995 to 2015, its share price surged by 105,000%. A $1,000 investment in the company’s shares in 1995 would have become more than $1 million by 2015.
You have five seconds to think about which company you want to own. Ready? I’m going to reveal their names now..
Both the first and second company are the same! They are Monster Beverage, a US-listed company that sells energy drinks. What this shows is that volatility in stocks is a feature, not a bug. When stocks go through their ups and downs, it’s not because they are risky – it’s just what they do! Even the best stock in the world will not give you a smooth ride up, but this does not mean it’s risky.
“Belief” No.6: I just need to find a world-class fund manager
[Slides 21 to 22]
The last common belief investors have that I’m going to discuss today is the idea that all they need to succeed in the stock market is to find a really good fund manager. If only it were that easy..
From November 1999 to November 2009, the US-based investment fund, the CGM Focus Fund, gained 18.2% annually. I’ll need all of your help to make a guess as to what return the fund’s investors earned over the same period…
Okay, now for the reveal. The fund’s investors lost 11% annually in the decade ended November 2009. How did this happen? CGM Focus Fund’s investors piled into the fund when it was doing well, but sold at the first whiff of trouble. This caused the fund’s investors to basically buy high and sell low.
CGM Focus Fund’s experience is not an isolated case because it happened with Peter Lynch, who is one of the best stock market fund managers the world has seen. From 1977 to 1990, Peter Lynch earned an annual return of 29% for Fidelity Magellan Fund, turning every thousand dollars invested with him into $27,000. But the average investor in his fund made only 7% per year – $1,000 invested with an annual return of 7% for 13 years would become just $2,400. The same problem with CGM Focus Fund happened to Lynch too. When he would have a setback money would flow out of his fund through redemptions. When he got back on track, money would flow back in after missing the recovery.
So investing with the best fund manager in the world is not enough – investors need the discipline to stay with the manager too.
Conclusion
[Slides 23 to 25]
To conclude, this is the important takeaway from my presentation that I hope you have: The stock market is a wonderful wealth-creation machine for investors who are able to invest for the long run in a diversified manner, both geographically and across industries.
The ride up is not going to be smooth. This is because humanity’s progress has never been smooth. It took us only 66 years to go from the first demonstration of manned flight by the Wright brothers at Kitty Hawk to putting a man on the moon. But in between was World War II, a brutal battle across the globe from 1939 to 1945 that killed an estimated 66 million. This is how progress looks like.
The stock market, ultimately, is a reflection of human ingenuity. The stock market is a collection of businesses that have been formed by entrepreneurs seeking to solve a problem. And so because human progress has never been smooth, the stock market won’t be a smooth ride up. But what an amazing ride it’s going to be.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Amazon, Apple, Facebook, and Microsoft.