Simply Invest: Naked Truths to Grow Your Money

INTRODUCTION

A BETTER

WAY TO INVEST

Have you ever wondered if there was a simpler way to invest? Investing is often presented as deeply complicated, risky, and accessible only to the sort of crazy-rich people who can afford to gamble away millions on the wildest ventures.

Buy this stock! Sell everything now! Follow this hot tip! Investment advice is endless, yet endlessly contradictory. From financial gurus proclaiming the secrets to ultimate wealth to salesmen pushing a baffling array of investment products, how can one possibly know what to do?

Yet investing doesn’t have to be this way. Over the two centuries of the financial markets, the combined power of data analysis and financial science has revealed several naked truths about investing. This book will bring you on a journey to discover those truths and how to use them to successfully and simply invest.

It will reveal why conventional investing methods fail and yet remain popular. It will explore some of the greatest theories of modern finance backed by decades of empirical research—which have also revealed the specific factors that drive investment returns. It will show how these can be optimised in a portfolio for the best possible return at a given level of risk. It will examine how to respond to market scenarios, the dangers of human instinct and the problems with alternative investments like cryptocurrencies and property. Finally, this book will discuss how to effectively integrate all these insights into a portfolio to realistically achieve your financial goals.

This book ultimately hopes to reveal that investing—and succeeding at it—is nowhere near as complicated or expensive as the financial industry may want you to believe. You don’t need to be rich, fearlessly reckless or a seasoned investor with multiple degrees in finance.

All you need are three simple things: discipline, commitment and the ability to wait.

PART I

REVEALING THE FOLLIES OF FORECASTING

We all know that we cannot predict the future. Yet the world of investing, as we know it, is riddled with questions that seek to defy this universal truth. Will the market crash soon? Which stocks will do best this year? Is this a good time to start investing, or should you wait until next year?

Perhaps we can blame the media for convincing us that such questions can be answered (or at least guessed at, with a reasonable degree of accuracy) by men in expensive suits seated behind an array of screens.

What gets far less media coverage are the studies through the years revealing that investors who follow their advice consistently and significantly underperform the market. That is, all that meddling around produces far worse returns than if they had bought a dumb index fund and just left it alone. (An index fund consists of a large basket of stocks that tries to duplicate a market index such as the S&P 500, which represents the 500 largest companies in the United States.) In fact, most opinions on the market are so often wrong that some even joke that they are a reliable contrarian indicator—i.e. whatever most investors think, the opposite is likely true.

Even the few investors who know this are often undeterred in their search for the best money manager or investment guru who can share their secrets and tell them where to invest to make the most money. It is always tempting to think that you might be the exception to the rule, and perhaps you might be lured by the thrill of being praised for your investing prowess when you succeed where so many others have failed. It is easy to think that you are smarter or more resourceful, and have access to market secrets that no one else has. That’s why many investors continue obsessively reading the news, searching and tracking the market, looking for the best stocks and investments, and then shifting their funds around whenever they think they have found a better deal.

Ultimately, the only consistent thing most of them accomplish is racking up a series of extra fees from all that trading that is likely to cancel out any minor gains. More dangerously, they could unknowingly end up taking risks they would not be able to afford if their investment were to come crashing down.

This first section of the book will show you how:

market predictions have been wrong far more often than right;

there is no systematic way to predict which investments will perform well; and

frequent trading from following market forecasts generates huge amounts of unnecessary stress and fees.

CHAPTER ONE

The Predictable Failure of Market Predictions

"You make more money selling advice than following it.

It’s one of those things we count on in the magazine business— along with the short term memory of our readers."

—STEVE FORBES

Headlines! They are the first thing our eyes are drawn to, with their huge fonts and shocking statements screaming for our attention. Catastrophe, crime and chaos rule the news. The bolder and more audacious a headline, the more our interest is piqued.

Financial news is no exception. Business journalists are masters at conjuring headlines that can strike terror into the hearts of even the most seasoned investors—or whip them up into an excited frenzy. Take, for example, Wild day caps worst week ever for stocks, which appeared on The Wall Street Journal in October 2008, or Local IPO market looking to a better 2019, from The Edge in December 2018.

Financial headlines constantly try to tempt investors into the losing game of outguessing the market. You’ll never see any of them declaring, The stock market is functioning normally, like it has for the past 90 years, or Nobody knows what the Straits Times Index will look like next Monday. Do you?

Instead, what you’ll find are brash predictions capitalising on our innate fear or greed. Energy stocks set to soar, one headline might say, and another, Why markets are still heading for a crash.

The year 2016 was a perfect example of why we should never let such predictions drive our decision-making. In the beginning of that year, as the stock market was correcting in earnest (a correction is a drop of 10 per cent or more from a recent high), market pundits and economists had all but announced the end of the bull market. Citing high debt, the devaluation of the Chinese currency and the end of oil, investors were advised to run away from stocks.

George Soros was one of the prominent figures who proclaimed that it was the beginning of the 2008 crisis again. Highly respected hedge-fund managers Carl Icahn and Stanley Druckenmiller sounded the death knell for stocks midway through 2016. BlackRock CEO Larry Fink warned that stocks might fall another 10 per cent. Citi described the global economy as trapped in a death spiral. The Royal Bank of Scotland even went as far as concluding that the market was in for a cataclysmic year ahead, and told all investors to sell everything.

Just the thought of the terrible bear market of the Great Financial Crisis repeating itself made many investors panic and sell their assets. After all, those billionaires with all their wealth, time and money invested in the stock market would surely know what they were talking about.

In the middle of the year, the outlook only worsened as experts predicted that Brexit would be very bad for markets. That sparked a flight to safe assets, like cash, and much turbulence in risky assets.

Following that, prior to the US presidential elections in November 2016, the market consensus was that Donald Trump would be disastrous for markets while Hillary Clinton would have a positive effect on them. As such, many banks and investment brokerages issued client reports detailing the level of disaster to portfolios and investments should Trump be ushered into the Oval Office. Some even went to the extent of quantifying the exact loss:

We believe that if Trump wins, markets are likely to fall further. —JPMorgan

The S&P 500 could potentially fall 11 to 13 percent if Trump wins the election...if Clinton wins, the index could rise 2 to 3 percent. —Barclays

The tail risks of a Trump victory or a Democratic sweep could result in a market correction in the 5 percent range (similar to Brexit).—Citi

Eventually, markets did react badly to Brexit—but for only two days, after which it promptly made back any losses! Likewise, Trump won but markets rallied, and 2016 ended the year on a record high.

Why do experts get it so wrong? How can they get it so wrong, with their armies of analysts, years of investing experience, market smarts and access to a massive array of data? How must they have felt when their forecasts ended up so far off the mark? Embarrassed?

Hardly. They merely revised, edited and removed their earlier predictions, and it was back to business as usual. Unfortunately, that was not the case for the investors who had followed their advice only to find themselves grappling with losses to their portfolios.

Perhaps the better question to ask is: What do experts gain from making such big, brazen statements in the first place? Could it be that they have a hidden agenda and have built up positions that would benefit them when people follow their public advice, as some banks did in the Great Financial Crisis?

More likely, it could be because the world is so flooded with such financial talent that the pressure to stand out is immense. If their predictions pan out, they could become famous and highly sought after by the many financial institutions hungry for rising stars. What better way to be heard, and reported on, than to say something outrageous enough to grab the headlines? After all, if you predict a bear market (where prices fall more than 20 per cent) every year for the next ten years, it is bound to happen eventually!

The sheer frequency of failed predictions can be frightening. An independent statistician, Salil Mehta (formerly the director of analytics for the United States Treasury’s Troubled Asset Relief Program), found that forecasts provided by the major investment houses do far worse than random chance. Surveying forecasts issued since 1998, he noted that these forecasters were actively adding negative value—essentially destroying value by issuing false predictions.

Ruchir Sharma, chief global strategist at Morgan Stanley, similarly observed how leading economists have consistently missed big market turns. For starters, not a single person has accurately predicted an economic recession in almost fifty years. They have also missed many market recoveries, including the unusually broad and global expansion of 2017.

What about well-known investment newsletter writers and strategists who claim to have tactical strategies to time the markets? They don’t do any better.

In economist William Sharpe’s 1975 study Likely Gains from Market Timing, the Nobel laureate showed that investors would need a forecasting accuracy of 74 per cent to outperform a diversified buy-and-hold portfolio. Remarkably, when CXO Advisory Group analysed 6,582 public forecasts that well-known experts had made from 1998 to 2012, they found that the most accurate among them had a rate of only 68 per cent—not enough to beat the benchmark! The average accuracy was a much lower 47.4 per cent.

David H. Bailey, Jonathan M. Borwein, Amir Salehipour and Marcos López de Prado did a follow-up study in 2017, noting that the CXO results weighted all forecasts similarly