EQUITY INVESTING IS NOT GAMBLING

You now have a handle on your balance sheet, and you have taken charge of your spending.??You know your numbers and have been saving for investing in your career, home, or that small business idea that you are passionate about.??Some of you have taken the plunge and invested in the shares of companies listed on the local stock exchange.??However, several of you have been asking if you should sell your shares given the impact of Covid-19, inflation and the war in Ukraine on economies across the globe.??So, I will address your concerns this week.

As most of you all know a share or common stock, also known as equity securities or equities, represents ownership in a company.??Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to a vote at the company's annual meeting and to a share in the financial benefits of ownership.

As Suze Orman notes in her book, “The Road to Wealth”, there are three advantages to investing in stocks: growth, growth and growth—provided you pick the right stocks.??Compared with other investment options like certificates of deposit, bonds, gold, cryptocurrencies, real estate and government treasury bills, stocks have provided investors with the best annual returns.

For example, the S&P 500 index has yielded an average annual return of about 12% from its inception in 1926 to the end of 2022, and this includes declines of more than 35% in 1931, 1937 and 2008.

S&P 500 Historical Chart

Investors in the Dow Jones Industrial Average (Dow), another very popular stock index, would have earned on average 8.14% from 1915 through the end of 2022, including a four-year decline of just over 80% from the beginning of 1929 to the end of 1932.??And our own Trinidad & Tobago Stock Exchange’s Composite and All T&T indices have grown 3.3% and 4.0% on average per annum from 2009 to 2022.

Dow Jones 100 Year Historical Chart

Time in the Market vs. Timing the Market

The Covid-19 virus, the war in Ukraine and increasing inflationary trends across the globe have severely impacted global financial markets.??The Dow declined by almost 9% and the S&P 500 by over 18% in 2022.??As the saying goes, there was blood on the streets.??Should we sell???Should we be running for the exits???Declining markets, bear markets (when a market declines by 20% or more from its highs), have an impact, but only if you sell.??In other words, if, like me, you take a long-term view you should realize consistent returns over time, while investors with a short-term view, who are constantly in and out, buying and selling, will most probably lose out.

For example, in 2008, the S&P 500 lost over 37% of its value.??If you had invested $1,000 at the beginning of 2008 in an S&P 500 index fund, you would have ended the year with a loss of $372.20.??At the beginning of 2009 your investment would have been worth $627.80.??Given increases in the S&P 500 of 29.81% in 2009, 14.15% in 2010, 1.4% in 2011 and 13.83% in 2012, your investment would be worth $1,073.75 by December 31, 2012, a compound annual average return of 14.36% for the four years.??If you sold, however, and moved your money into safe investments, like certificates of deposit or bonds, it is unlikely that you would have been able to recover that value over the same time period.

No one knows ahead of time when the stock market will decline.??If you don't have the courage to stay invested through a bear market, then you should avoid investing in stocks or be prepared to lose money, because no one can consistently time the market to get in and out and avoid the declines.

If you choose to invest in stocks, learn to expect the down years.??Once you can accept that there will be declines, you will find it easier to stick with a long-term investment plan.??The good news is that financial markets produce great wealth for their participants over time.??Stay invested for the long-haul, continue to add to your investment, and spread your risk appropriately and you will meet your financial goals.

Let’s look at some of the more popular stocks traded on the Trinidad and Tobago Stock Exchange over the last fourteen years.??Please note that I will be looking at pure capital gains.??This analysis does not include the dividends earned from these stocks.

The banking sector (excluding First Citizens and FCIB) returned a compound annual average growth rate of 7.2% from January 2009 to the end of 2022 and is down on average by 1.6% for 2023 so far, primarily because of declines in the Jamaican stocks.??However, those same stocks rewarded their investors with very healthy annual average returns of 8.2% (JMMB) and 13.2% (NCBJ) from January 2009 to December 2022.??Republic delivered annual average returns of 3.5% for its shareholders over the fourteen years from 2009 to 2019 but is down 1.4% so far this year.

The local conglomerates have also done well.??An investment in ANSA McAL and Massy would have grown, excluding dividend income, by 0.2% and 4.4% each year on average from 2009 to 2019.??However, ANSA McAL is down YTD 2023 by 3.2%, while Massy is flat.??Guardian Holdings has also been good to investors over the years—with an annual average return of 2.9% since 2009 and a whopping 43.5% in 2021.??The only sector that has consistently under-performed is media and I suspect that they are a casualty of the move to digital and their slow response to the impact of social media.

Traders “time the market”.??They attempt to buy at the lowest price and sell at the highest.??However, very few traders, if any, are able to consistently beat a?“TIME?IN?THE MARKET”?strategy.??As Peter Lynch, manager of Fidelity Investments’ Magellan Fund, which averaged an annual return of 29.2% (more than double the return of the S&P 500) between 1977 and 1990 noted, the greatest returns are made by investing for the long-term.??He said, “Absent a lot of surprises, stocks are relatively predictable over twenty years.??Holding investments for the long-term was the most effective strategy.??The price at which you bought a share was not important.??How long you held it was what mattered.”

As John Jennings, writing in Forbes, noted “… we must learn to sit in the discomfort of uncertainty.??We should admit to ourselves that we do not know what the market will do ….??The probability is that it will be up, but it might be down.??Nobody knows for sure.”

Respectfully, I do not believe that this is the time to be selling particularly if you are in for the long-term.??In fact we should be looking for opportunities to invest and take advantage of declines in well-run companies locally and internationally.

Next week we will look at Warren Buffet’s approach to selecting those well-run companies.??Have a disciplined week as you work to build your financial freedom.??If you find this advice helpful, please share with your friends and colleagues.??As usual, I look forward to your questions and comments.??Be safe.??Take good care, and if you can, help someone in need.

Cheers, Nigel

Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants