Showing posts with label KLSE market returns. Show all posts
Showing posts with label KLSE market returns. Show all posts

Thursday 4 May 2017

Investing has a whole new set of rules.

If we are to be successful, we need to play by these new rules.


Why the average equity fund investor underperforms the market?

From 1993 to 2012, the S&P Index 500 averaged a gain of 8.21% per year.

However, during that same 20 year period, the average equity fund investor had an average annual gain of only 4.25%.  

Had the average equity fund investor just bought a low-cost S&P 500 Index fund and held it, he/she would have almost doubled their rate of return.

The underperformance was due to investor behaviour such as market timing and chasing hot funds.

Had these investors been long-term, buy-and-hold investors, they would have earned close to the market's returns.

When the average investor underperforms the index by such a significant amount, it is clear that most are playing with a bad set of guidelines or none at all.

A one-time investment of $10,000 invested at 8% compounds to $46,610 in 20 years.

The same $10,000 invested over the same period at 4.25% compounds to only $22,989.


Short-run performance of the stock market is random, unpredictable and very volatile

The short-run performance of the stock market is random, unpredictable and for most people, nerve-racking.

The next time you hear someone saying that he/she knows how the stock market or any given stock is going to perform in the next few weeks, months, or years, you can be sure they are either lying or self-delusional.


The long-term trend of the stock market is up and its performance consistent

There is more than 200 years of U.S. stock market history and the long-term trend is up.  

Over the long term, stock market performance has been rather consistent.

During any 50-year period, it provided an average after-inflation return of between 5 and 7 percent per year.

If you invested in a well-diversified basket of stocks and left them alone, the purchasing power of your investment would have doubled roughly every 12 years.



Stocks over the long-run offer the greatest potentials return of any investment

Although long-term returns are fairly consistent, short-term returns are much volatile.  

Stocks over the long-run offer the greatest potential return of any investment, but the short-run roller-coaster rides can be a nightmare for those who don't understand the market and lack a sound investment plan to cope with it.  

The 1990s were stellar years for stocks but the 1930s were a disaster.

Saturday 13 November 2010

Market PE and Ten-Year Forward Real Returns (S&P 500 Index)

“It’s time in the market, not timing the market that counts."

This gives rise to the all-important question: does one’s entry level into the market, i.e. the valuation of the market at the time of investing, make a significant difference to subsequent investment returns? 




This analysis strongly confirms the downward trend of the average ten-year forward real returns from the cheapest grouping (PEs of less than six) to the most expensive grouping (PEs of more than 21).

The second study also shows that any investment at PEs of less than 12 always had positive ten-year real returns, while investments at PE ratios of 12 and higher experienced negative real returns at some stage. 

A third observation from this analysis is, interestingly, that the ten-year forward real returns of investments made at PEs between 12 and 17 had the biggest spread between minimum and maximum returns and were therefore more volatile and less predictable. 

It is easy to understand why Grantham came to the conclusion that “the best case for caution and bearishness is value, which is a weak predictor of one-year returns, but a dynamic predictor of longer-term returns”.

http://investmentpostcards.wordpress.com/2007/06/05/us-equity-returns-what-to-expect/


Thursday 22 October 2009

Returns on share investment in Malaysia

Over the long run, the return on an investment of shares is very much higher than the return on fixed deposits. 

Historically, in Malaysia/Singapore, the return on share investment had been about twice as high than that obtainable on fixed deposit (based on past ten years' record). 

However, since one can never get something for nothing, the much higher return has been accompanied by much greater riskiness of an investment in shares because much of the return from share investment has been in the form of capital gain which is highly unpredictable. 

Historically, about three quarters of the total return obtainable from share investment has been obtained by a combination of good years when the return may be higher than 100 percent as well as bad years when the loss may exceed 50 percent

The changes in the price of share have been so large that they totally swamp the small regular income one can get from shares (in the region of 2-4% on the value of the initial investment).

Saturday 13 June 2009

How can you improve your investment returns in stocks?

The adage, "Buy low and Sell high" and pocket the profit, is well known. I like to also remember it this way: "Never buy high and Never sell low".

The subsequent discussion applies to investing in high quality good stocks bought at a bargain only.

How can the average investor improves his investment returns in stocks? More specifically how can an average investor improves his return to 10% annually? Even better, to above 15% annually and consistently? Let us examine some factors affecting investment returns.


1. Stock selection

This is important. You wish to have a stock that gives you a good total sustainable return over many years. You will need to invest in those stocks with a high ROE of at least 15% or more. Also, these stocks should have good earnings growth (EPS growth) that is consistent and sustainable. Such companies run businesses with a huge competitive advantage over their competitors with a large moat.


2. Buy when the selected stock is selling at a low price.

This is the better way to get superior return - the potential return is higher with concomitant lower risk. Invest in "value stocks". A good portfolio should always have cash available to benefit from a bear market or a correction or panic sell in a bull market/or a specific stock.

Here is a recent illustration from icap. to emphasize this point:

"This pleasant result is due to the “Intelligently Eclectic” value investing style that Capital Dynamics has adopted for the last 21 years. What does it mean in practical terms ? A stock that the i Capital Global Fund invested in plunged around 85% during the 2007-2009 bear market. However, instead of selling as it dropped, we bought so much more of this stock that the cost price plunged around 80% too. By now, the i Capital Global Fund is sitting on a gain of 175% on this particular stock. The reason why ICGF bought so much more was because if it was attractive at higher prices, it is even more attractive at depressed prices since the business fundamentals of the company have not changed. "


3. Taking profit

Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.

Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.


4. Reducing serious loss

When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.


5. Diversify, but not overdoing it

According to Buffett, adding the 7th stock to the portfolio reduces the return without reducing the overall non-systemic risk. of the portfolio. Select the best 6 stocks. If you need to add money to your portfolio, buy more of these preexisting stocks when they are offered at a good or bargain price. If you identify a better stock to invest, perhaps, this should replace one of the preexisting stocks in the portfolio.


6. Asset allocate according to your risk taking ability

It is perplexing to know of investors whose days are affected by the swings in the market. You should not bet your total networth into the stock market. Allocate the amount that you are willing to risk.

Many long-term investors are always riding on a significant amount of gains. This means that they will only lose their capital in very unlikely extreme situations.

Here is an example to illustrate this point.

"After investing more than £2 bln in Barclays Plc, two years ago, Temasek, the well-known investment arm of Singapore, recently sold its stake in the British bank at a big loss."

Sometimes you made a serious mistake, or events turned against you, and there is no way to redeem this without taking a big loss. The only protection here is you have allocated your allocate asset appropriately such that this "black swan" phenomenon won't harm you irreparably. Hopefully this will not 'stopped out' in your investing.


7. So far so good. The hardest part: getting wired like Buffett and Teng Boo!

To invest like what Teng Boo did in ICGF, you need to be knowledgeable and able to execute 'coldly' (or cooly) without being affected by emotions. These are among the harder skills to master. Have you wondered what drives this blogger to write on investing? Through writing, rather than lurking, you can focus on the facts and solidify your knowledge, philosophy and strategy.

Admittedly, there is no single philosophy or strategy; but you should have one to guide your investing. It prevents you from over-reacting to emotions and circumstances, that may harm your portfolio and investing returns. As this discussion assumes the portfolio contains only good quality stocks, it prevents you from "Buying high and Selling low" due to falling prices in the market. It may allow you to benefit hugely from the volatilities and follies of the market; making volality your friend.

Understanding and mastering this field of behavioural finance is yet another challenge to higher investment returns for me.

Review of potential past KLSE market returns

In 1997, this KLCI touched the low of 300 points briefly. Today, the KLCI is about 1,100. From 1997 to 2009, the KLCI has compounded at 11.4% per year over the 12 year period. To achieve this 11.4% return. The KLCI was a low of 850 at end of 2008; giving a CAGR of 9.93% over the last 12 years. To achieve these returns, you would have to have invested a lump sum at the trough of the market in 1997.


What of the performance of the average investors?

This is the average guy. He is the guy who invests regularly whenever his savings allow him. He is not among those who achieved the 11.4% compound annual return.

Let us make this assumption to facilitate some calculations. His dollar cost averaging over 12 years approximates to a lump sum investment in the market from KLCI 700 to KLCI 1100 over 6 years. His gain is the equivalent of compounding annually at 7.82% over 12 years. When the market was at its low at end of 2008 (KLCI of 850), his CAGR over 12 years was 3.29%. (KLCI 700 is chosen as it is the average of the trough KLCI of 300 in 1997 and present KLCI of 1100.)

How can this average investor improves on his investment returns? More specifically how can he improves this return to 10% annually? Or, to above 15% annually and consistently?


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Return Rate (Discount Rate / CAGR) Calculator
http://www.moneychimp.com/calculator/discount_rate_calculator.htm


Total return from a stock
= (Capital appreciation + Dividend + Profit from Sale of Stock)/Amount Invested
= (Capital appreciation + Dividend + Profit from Sale of Stock)/(Value of Stock + Cash)


Total return from a portfolio
= (Capital appreciation + Dividend + Profit from Sale of Stocks)/Amount Invested
= (Capital appreciation + Dividend + Profit from Sale of Stocks)/(Total Value of Portfolio + Cash)