The S&P 500 increased by 30%, and the NASDAQ soared by 38% but did so with very little volatility. The largest market drop from peak to a trough during the year was 6% ... this was the smallest pullback since 1995, when the peak-to-trough drop was only 3%.
Just to put it in perspective, the largest intra-year peak-to-trough drop in the past 40 years was 49%, which happened in 2008, less then five years ago. The largest peak (October 2007: 1565) to trough (March 2009:667) was a terrifying plunge of 57%!
In hindsight, 2013 seemed like a cakewalk, with the stock market going straight up. But that wasn’t the case for how most investors saw it. In fact, many investors, both public and institutional, sat on the sidelines most of the year and missed out on the stock market gains.
Hedge funds, run by some of the brightest and richest managers, underperformed the S&P 500 in 2013. The Hedge Fund Index was up a little more than 7%, trailing far behind the 30% return a mom-and-pop investor could’ve made by just buying a low-cost S&P index fund.
Most investors missed out last year because they were too distracted by economic and world events, causing them to keep their money in cash or low-yield bonds.
Wall of Worry
Having the proper temperament is one of the keys to successful investing. Knowing how to buy financially strong companies when they are trading at bargain prices is not something beyond the ken of people with average IQs.
The hard part is actually buying and then holding onto the position when news and events are constantly unfolding around you … and in 2013 there was plenty to worry about. If you invested based on news, economics, and world events, you most likely didn’t even come close to making stock market returns.
Here is the month-by-month wall of worry that investors had to face in 2013.
Reason to worry
Fiscal cliff and tax increases
Sequester spending cuts
Italian election debacle
Cyprus financial crisis, Boston bombing
Emerging market currencies plunge
Fed tapering worries
Syria strike concerns
Fed chairman uncertainty, gov’t. shutdown, debt ceiling
Iran’s nuclear facilities, bubble in asset prices
China’s cash crunch
At almost any time this year, there could’ve been a valid reason for investors not to buy stocks. Just as they built up the courage to invest, they would’ve been hit by another equal or worse worry, which caused them to hesitate and not invest.
Many of these investors would rather wait on the sidelines until things settle down. Warren Buffett (Trades, Portfolio) described this hesitancy as “market guessing” … when investors wait for the future to be clearer. He said, “The future has never been clear to me (give us a call when the next few months are obvious to you–or, for that matter, the next few hours).”
The problem with investing by trying to take into consideration geopolitical or economic events is that it is very hard to do. Investors would do themselves a service by learning from legendary investor Walter Schloss and how he approached investing.
Schloss started on Wall Street in 1934 and then went to work for Ben Graham when he returned from World War II. In 1995 he left Graham and started his own investment firm. With nothing more than a copy of Value Line in an office the size of a closet, he averaged a 15.3% compound return, versus 10% for the S&P 500, over the course of 45 years.
Regarding forecasting or making predictions, Schloss said,
Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
An Approach That Works
In a few more months we will be completing our eighth year of writing Hidden Values Alert. Many of the subscribers who signed up in February 2005, when we published our first issue, are still subscribers today. We are most grateful for your loyalty.
Since we first began writing in 2005, there have been many reasons to worry and not invest: burst of the housing bubble, subprime crisis, recession, a bear market, U.S. downgraded to AA+ from AAA, etc.
Instead of focusing on trying to predict events or their outcomes, we focused on researching the fundamentals of companies and investing in them only when they were trading for bargain prices. The importance of buying stocks when they are selling below the worth of their underlying business can’t be stressed enough. It’s all about getting more value than you are paying for.
James Montier, a member of GMO’s Asset Allocation team, wrote that the Golden Rule of investing is no asset (or strategy) is so good that you should invest irrespective of the price paid. He also added that “one of the myths perpetuated by our (financial) industry is that there are lots of ways to generate good long-run real returns, but we believe there is really only one: buying cheap assets.
Montier, James. “No Silver Bullets in Investing (just old snake oil in new bottles).” GMO LLC. (2013): 05 Dec. 2013.