Some Good Investment Research… and Terrible Advice

I didn’t want to blog about investing till much later, but the Straits Times had an interesting article yesterday titled Stocks v Property. It deals with the issue of “Where the hell should I put my money?!” when it comes to investments. Everyone talks about investments, like: “yeaaahhhh I should really save up for a house… but it’s really expensive…” or “yeaaaahhh I’ve been meaning to invest for awhile now, but I don’t think I have enough time/money/interest…whine whine whine”. But very few people actually get off their ass and actually do some real research on what they should be investing in, so they either 1) don’t invest altogether, or 2) make some stupid investment decisions.

So an article like this gets some of that research done for you, which is awesome. I loved the first part of the article, which used numbers and statistics to back a case and destroy some common assumptions that we all have. The article should’ve just stopped right there, but part 2 of it gave some absolutely terrible investment advice, and I just had to say something about it, in a minute.

Some good investment research

From the ST article: “Retail investors, especially those in Singapore, tend to think of stocks as a short- to medium-term investment. When seeking a long-term investment, most Singaporean investors think of property first. 

But a recent comparison done by the Singapore Exchange (SGX) has shown that, in fact, local stocks have outperformed private residential property over the long run. In the 10 years from 2001 to 2010, the benchmark Straits Times Index (STI) gave an annualised return on investment of 4.9 per cent. Meanwhile, if you had bought property in 2001 and sold it in 2010, you would have made an annualised return on investment of 3.9 per cent over the period.”

Sure, the study excluded returns from dividends and rents, but add those into the mix and stocks have still historically outperformed real estate over the long run. And while 10 years is hardly considered to be the “long run”, other studies have shown that stocks have outperformed real estate over longer time periods (see this New York Times article).

Some terrible investment advice (esp if you’re young):

So the Straits Times article would have been awesome if it had presented the statistics, drawn a conclusion, and stopped there. But page 2 of the article had some terrible investment advice:

Mr Vasu Menon, OCBC Bank’s head of content and research, noted that such wild swings in the stock market are even more prevalent today. As a result, he said, holding on to stocks for the long term is no longer a relevant strategy in this day and age.” (emphasis added).

“So even if stocks had outperformed property between 2001 and 2010, he said, there is no guarantee that they will do the same over the next decade. His advice: Set a target for your stock investments and have the discipline to stick to it. Say, for example, that you hope to make a 30 per cent return on a certain stock within three years. If the stock somehow reaches that 30 per cent target within six months, just sell, Mr Menon said.”

Hello?! Stocks are “no longer a relevant strategy in this day and age” just because the market has been volatile and uncertain? Mr Menon obviously needs a lesson in economic history: volatility and uncertainty are NOTHING NEW to the stock market. They’ve always been there – the Great Depression from 1929, the 1940s when stocks pretty much didn’t go anywhere, the “Black Monday” of 1987, the dot-com bubble of 2000, the collapse of Lehman in 2008…  and yet the US market has averaged a whopping 9.96% annually from 1920 to 2010. Volatility and uncertainty aren’t “unusual”, they’ve been characteristic of the stock market for the past 200 years. And anyone hoping to benefit from the long-run return of the stock market would have to learn to deal with these characteristics.

Next – Mr Menon is advocating that you cut your gains short by selling as soon as your stocks make a certain amount of profit. Sure, that might prevent your portfolio from turning into a loss, but it also prevents you from ever getting rich if the stock market does take off, leaving you sitting by the sidelines and whining like a baby. If you’re a young investor with a steady income and many years of investing ahead, then Mr Menon’s advice is absolutely terrible for you. He’s right that there is no guarantee stock prices will rise over the next decade – there are no guarantees when it comes to investments (unless you consider Ponzi schemes to be “investments”) – but over a long enough time period, there’s a pretty damn high likelihood that the stock market will come out on top.

So what the hell should you do?

Let’s be clear – your job isn’t to make sure that your portfolio makes money over the next 6 months, 1 year, or 3 years. Your job right now is to ACCUMULATE as many assets as you can. Since we know that stocks are ultimately likely to give you the best return over the long run, your job is to make sure that you have as many of those assets as possible, so that your returns will be multiplied across all those assets after a long, healthy period of investing! We’re talking 10, 20, 30 years here. Who cares if volatility wrecks havoc to your portfolio over the short run – it doesn’t make a difference because you’re not thinking of selling within the next couple of years anyway. Ignore the day-to-day fluctuations, ignore the uncertainty and fear that pervade the news, and ignore the stupid, complicated investment advice out there. Investing can be simple, straightforward, and best of all, automated (I’ll be blogging about that in time to come). Stick to your guns and accumulate as many stocks as possible, and you’ll be rewarded in the end.

To me, the answer is pretty clear: multiple studies, research and 200 years of stock market history have shown that the stock market is more likely to give you a better return over the long-term. Do I think that property is a bad investment? Of course not. The best portfolio would consist of both stocks AND real estate, among other asset classes. There’s way too much to say on this topic, so I’ll be blogging more about it as we go along. But I thought I’d start us off with a little taste of it here. 🙂

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2 thoughts on “Some Good Investment Research… and Terrible Advice

  1. My 2cents:)

    First, my caveat is with SGX’s research article. I find this one particularly misleading. When you compute statistics, the time frame actually distorts the ‘truth’. 2001 was when stocks hit rock bottom due to 9/11. During these 10 years, Greenspan who was still the FED chief then, lowered interest rates, and this facilitated easier borrowing which led to stock bubbles and later on the housing bubble. The bull run came in 2005 onwards, and it was massive. Although the market crashed in 2008, but it rebounded insanely quick and went close to pre-crisis levels in 2010. It is misleading because that period was one with the most gains in a decade.

    Next is with NYT’s article. Well I admit the time frame is long and reasonable to compute the statistics because its long enough to ‘smoothen’ the stats. But I find that its a flaw to assume stocks will always outperform based on the 200 year history. Because:

    1) its largely in the US context. These stocks are linked to the US economy and we all know US prospered and had one of their best years during the last 50 years. But now US is just stalling; I mean it has reached developed status, how much more can it be developed? Especially with a 13 trillion debt, I just have a bad outlook on US on the whole. Its a superpower no doubt, but I feel that growth is just going to be limited.

    2) The exponential growth in stock prices from time immemorial was also attributed to opportunity to invest in other economies which were opening up and we all know US is such a big bully; they always get the best deals. Throw in capitalism and there u have it. And to fuel the greed, we’ve had all these complex man-made structured products i.e. options, CDS etc that fucked us up recently (sub prime) So whatever ways to maximize the gains or exploit, I believed they have already been used (but i could be wrong)

    I believe (2) was what contributed to the appreciation of stock prices primarily. But in light of today’s economies, I doubt it will enjoy that sort of growth it had for the past 200 years because its already saturated. Plus there’s too much shit in this flawed financial system of ours. How much longer can ‘they’ artificially prop it up? How many more QEs? They all don’t work; they just create bubbles elsewhere.

    And I thought Mr Menon’s advice is actually pretty sound if you ask me. Stock market crash cycles are actually getting smaller; not sure if u realized from your examples. So it makes perfect sense to sell for a profit and wait for a correction or crash to buy in. I mean ure talking about blue chips, getting a 30% gain is difficult unless you bought it cheap. But then again, 30% may be possible for mid caps and even likelier for penny stocks.

    Instead of accumulating assets, it might be wiser to accumulate cash instead? When the next crash comes, that’s when we enter?

    In short – stocks are a must have in one’s portfolio. My only disagreement is not to accumulate now but accumulate them in batches when the markets crash. (Batches because you can never predict the bottom) Then sell them for a sizeable profit later on. Rinse and repeat.

    On a side note, Happy new year Lionel! We should meet up over drinks. Apart from talking fun shit, it’ll be cool talking of shit with kakis of similar interests. Cheers.

    p/s: Btw its vague when you mention accumulate assets. But i believe you might be talking about accumulating ETFs which tracks the index which is safer than buying the stocks itself, after all components that make up these indices change over time. And I believe the ETFs pay out dividends too, at least for STI ETF.

    • Hi Mark!

      First of all, thanks for commenting! I love it when I get to have discussions on personal finance, and it’s nice to know someone’s reading my posts and analyzing them! My responses:

      1. You’re right that the SGX study picked a favorable time period. 2001 was a terrible year for stocks, which was why I didn’t like the 10 year time period because I thought it was too short. Having said that, I suspect that even if you extended the time period under study, you’d still find that stocks outperformed property. This same study has been echoed all around the world, and I doubt that Singapore is unique here.

      2. The NYT article talks about the US markets, but you’ll find that the stock markets for developed countries are very highly correlated. This is especially so for Singapore, where much of our economy is still dependent on the US economy. On the US economy stalling, people had the exact same sentiments in the 1930s, the 1940s, the 1970s, and after the dot-com bubble burst in 2001. Great Britain was also once the world leader in the economy, with a thriving stock market. They have since retreated to being (almost) irrelevant on the world stage, but their stock market remains resilient, and much, much higher than it was even 50 years ago. The fact is that developed economies will continue to grow as long as their businesses are sound. On a fundamental level, the stock market is dependent on businesses like Coca-Cola, P&G, Microsoft, Apple, and Johnson&Johnson. Are they going away any time soon? Probably not. Will their stocks and the stock market see scary declines within the next decade? Sure. But I doubt that any stock market crash is going to stop Coca-Cola from selling Coke, or P&G from selling shampoos. As long as businesses continue to grow, the stock market will survive, and grow.

      3. Have there been bubbles created? Sure. But stock market history is comprised of bubbles and crashes. It’s an inherent characteristic of human nature, and they will never go away – no matter what the government does. Yes, I agree that the levels of debt that the US is carrying is scary, and Europe’s debt crisis is casting a lot of uncertainty over the economy. But what’s the worst that could happen? The market crashes (as it always has), governments go bankrupt, and we enter into another Great Depression. It lasts for a couple of years, maybe even a decade, (which gives young people like us plenty of time to accumulate stocks at steep discounts), and then people gain confidence, greed starts to take hold, and the market takes off again. One trend that we see though – is that with every crash, rise and crash again, the market rises higher and higher with each cycle. Three reasons why this happens:
      a. Inflation – which naturally causes price appreciation
      b. Population growth – causing more liquidity to flow into investments. Money has to go SOMEWHERE, and the stock market is still the investment vehicle of choice for most of the world
      c. Weak companies get dropped off the index, and new, stronger ones replace them.

      4. If I had a crystal ball, I would gladly stay in cash and invest it all once the market bottoms out. The trouble is, none of us ever know what’s going to happen. In early 2009, how many people, frightened by all the talk of the next Great Depression, sat out of the 100% rally in the stock market starting March ’09? By the time they jumped in, the market was just topping out. Which is why I advocate investing at regular intervals (either monthly or quarterly), no matter what the market does. (I’ll be blogging more on that later!). It’s a surefire way of ensuring you accumulate more assets when the market is undervalued, and less when the market is overpriced. By doing that, you’re collecting assets at the “average” price. And then you’re really taking advantage of the mega long term trends, and ignoring the short term market cycles.

      5. Yep, you’re right that I was referring to ETFs (which I invest in myself), though they have their own counterparty risks too. I mentioned assets because if people had enough capital to purchase actual physical stocks that comprise the index, or purchase index funds, then those are equally good as well.

      Yep, totally down for drinks to discuss finance, and random cool shit 🙂

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