Learning from significant investment statistics of the past

PAST performance is no guarantee of future results. There is truth in this statement.

And yet, as Mark Twain once said: “History never repeats itself, but it does often rhyme.” As we begin 2024, it is useful to look back at historical statistics and numbers to guide us on how we should invest.

I am not talking about looking back at 2023 alone. In my book, the best lessons are learnt over years, if not decades. So, let us go further back in history to learn from the past.

Outfoxed by the pendulum

The Nasdaq had a terrible year in 2022, falling by a third. But 2023 was a different story. It was one of the best years in the market, when the index rose by almost 45 per cent.

Howard Marks has a word for this sharp contrast: pendulum. Marks is the co-chairman of Oaktree Capital Management. He once said the stock market resembled a pendulum, swinging back and forth between highs and lows.

Do not be lured into timing your entry and exit into and out of the market, though. You cannot tell when the pendulum will change direction. Trying to sell at the top and buy at the bottom is extremely difficult to do, as you will soon see.

Outfoxed by average returns

Marks had another insight on the pendulum’s arc: The midpoint of its swing represents the “average” but it spends very little time there.

This is also true with the stock market. For context, the S&P 500 had an annualised return of 9.8 per cent from 1928 to 2023. But data from Morningstar shows returns from one year to the next can vary widely. There are even years when the index went up or down by more than 40 per cent.

Here is the good news – quoting David Gardner, co-founder of investing advice company Motley Fool: “Stocks go down faster than they go up, but go up more than they go down.”

That is also true when you look at the data. According to wealth manager Ben Carlson, the S&P 500 delivers a positive return in roughly three out of every four years. In other words, your odds of making a gain are 75 per cent if you remain invested. That is better than a coin flip.

Outfoxed by a rising market

At the start of 2023, a US equity strategist from Morgan Stanley warned that the S&P index could suffer a 20 per cent fall, weighed down by weak corporate earnings.

The bank was hardly the only one feeling bearish. Investment bank JP Morgan also cut its earnings forecast for S&P 500 companies, predicting that the index could revisit its 52-week low during the first half of 2023.

Neither prediction came true. The S&P 500 returned over 31 per cent in 2023 and did not even come close to retesting its lows during the year.

What can we learn from this? Ignore the stock market forecasts that come out at the start of the year. They can generate clicks, but are often wrong. Besides, having access to more data or expertise does not guarantee better outcomes – even for the big investment banks. Do not be swayed into taking action.

Outfoxed by rising interest rates

Interest rates are another favourite among forecasters. In 2022, the US Federal Reserve raised interest rates from zero to between 4.25 and 4.5 per cent.

As you know, the stock market suffered one of its worst performances during this period.

When two trends coincide with one another, it is tempting to put two and two together and conclude: Interest rates rose, and therefore, that is why the stock market fell. But we cannot say the same about 2023. Last year, rates were hiked again by another percentage point to between 5.25 and 5.5 per cent. This time, the stock market staged a rally.

The contrast between 2022 and 2023 is a timely reminder that correlation is not causation. Give yourself time to learn the right lessons – preferably over multiple years, rather than the past 12 months. If you learn the wrong lessons from past events, then you will be doomed to repeat them in the future.

Outfoxed by GDP growth

Speaking of trends, China’s gross domestic product grew from around US$493 billion in 1992 to an astonishing US$18 trillion in 2022, said the World Bank. The annualised GDP growth rate for this period is almost 12 per cent.

But the same cannot be said about China’s stock market returns. The MSCI China index as recorded negative gains from its inception at end-1993 until end-2023. In other words, the rapid GDP increase did not translate into positive stock market returns, even after more than 30 years.

What is the reason for this disconnect?

The underlying earnings per share for the Chinese businesses within the index barely grew for much of this period. Over the long term, stock market returns depend on business growth. Without it, you end up with flat to negative returns, as you see today.

Outfoxed by a bullish market

Short sellers, or traders who bet on market declines, had a field day in 2022, recording gains of over US$176 billion, indicated data from Ortex. But if you want to try your hand at shorting, think again. In 2023, short sellers gave back almost all their gains, recording US$145 billion in losses.

What’s more, this cohort recorded negative returns in four of the last six years. In total, short sellers had losses of over US$584 billion between 2018 and 2023, versus gains of a little over US$237 billion over the same period. They recorded net losses over this period.

Shorting is a hard game to win when the odds are against you. Remember, the stock market moves up in three out of every four years. If you go short, you are wilfully taking lower odds of success.

Get smart: Invest for the long term

When you hold stocks for the long term, you will occasionally record negative returns. It is the price you pay for a positive outcome. And yet, staying invested for the long haul gives you the best chance of success.

Since 1928, there has never been a 20-year period where the S&P 500 produced negative returns, noted Carlson. What is more, if you missed the five best days (read: positive returns) in 2023, the index’s gain would almost halve from over 24 per cent to 12.6 per cent. Miss the best 15 days, and the returns would be negative.

To put these figures into context, let us assume there are 252 trading days every year. Miss five of the best days or 2 per cent of trading days and your results could be vastly lower. Miss 15 days, or less than 6 per cent, and you could be sitting on losses.

The good news is: You do not have to do anything to stay invested for the long term. Surround yourself with like-minded friends. As the saying goes: If you want to travel fast, go alone. If you want to travel far, go together.

The writer owns index unit trusts which track the S&P 500. He is co-founder of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage.