Dear Smart Investor,
2024 has been a year of record highs for the stock market.
The S&P 500 (INDEXSP: .INX) hit successive all-time highs throughout the year while Singapore’s Straits Times Index (SGX: ^STI) closed in on a 17-year high.
It’s a performance which was unexpected, as you will soon see.
As the curtains come down on 2024, I would like to share some of my favourite snippets from The Smart Investor in 2024 with all of you today.
Take it as the greatest hits for the year.
Let’s go!
Outfoxed by the Stock Market: 15 Telling Statistics and Numbers for 2024
After the S&P 500 rose by over 24% in 2023, many were expecting a subdued performance in 2024. Some were even tempted to exit the stock market with the idea of buying back when the market inevitably falls.
Instead, the index broke new highs as early as January and never looked back.
Here’s the thing: historically, the odds favour a stock market rise, as my January 2024 Business Times article pointed out:
“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 is 75 per cent, if you remain invested.
That’s better than a coin flip.”
It’s not to say that stock markets can’t fall. But understanding the odds is better than trying to predict what will happen from one year to the next.
Get Smart: Are We Due for a Stock Market Crash?
Based on historical data, the S&P 500 index undergoes a market correction once every two years.
Bear markets, when markets fall by 20% or more, happen once every seven years.
However, as I pointed out in earlier in February:
“Here’s the important distinction: knowing these odds do not tell you when the market will crash.
For instance, just because the market has historically corrected once every two years, it does not mean it will happen like clockwork.
History has shown that a bull market can continue for years without a 10% correction.”
But wait, how do we protect ourselves from market crashes?
For starters, it’s about expectations — if you are not expecting to suffer from any declines at all, then that is unrealistic.
The best strategy for a volatile market is a calm mind.
How the stock market can trip you up
Above all, a dose of humility is in order:
“Hedge fund manager Seth Klarman’s offers a valuable perspective. He said: When you buy anything (in the stock market), it’s an arrogant act.
You’re saying that markets are gyrating and somebody wants to sell this to me and I know more than everyone else so I’m going to stand here and buy it.
That’s arrogant, he said.
Klarman adds a key point: You need the humility to say “I might be wrong”.
Humility, in this case, isn’t merely a virtue; it’s an investor’s most trusted advisor.”
Is Diversification a Blessing or a Curse?
What about diversification?
Well, there are many flavours to diversification.
Ultimately, it’s about reducing risk, something which can also be achieved through diversifying over time, or sizing our stock positions.
For me, diversifying is an outcome, where your winners grow to occupy a large allocation in your stock portfolio, hence:
“… if the best-performing stock continues to do well, it will drive most of your returns in the future.
That’s a pretty good outcome, isn’t it?
As you diversify to find more winners, the best of them will naturally rise to the top — thereby concentrating your portfolio in the right set of winning stocks.
That’s more than any investor can wish for.”
Get Smart: Is it Time to Sell Your Nvidia shares?
But what if one of your stocks, say Nvidia (NASDAQ: NVDA), has grown from four digits to six digits? What if it has become a large chunk of your overall wealth?
“Plainly speaking, at the Smart Investor, we are advocates of stock investing.
But we also recognise that it is a vehicle to get you to where you want to go.
So, if the gains at Nvidia today have helped you close in on your financial goals, we would say that it has fulfilled its purpose.
After all, you are successful when you achieve your own goals and not because you beat the market or did better than your peers.
Let that be your North Star for future decisions.”
Get Smart: The Hidden Stars of the Stock Market
Whether it is Nvidia or another winning stock, there are always opportunities to learn. In time, you will find “patterns of success”:
“When it comes to investing, no one can give you a 100% guarantee that a stock will rise in the future.
That said, you can tilt the odds in your favour.
And how do you do that?
… instead of casting your net into the wide sea to look for opportunities, you learn how to recognise “patterns of success” which can increase your chances of obtaining a favourable investment outcome.”
The Investor’s Dilemma: To Buy Or Not to Buy?
The NASDAQ Composite Index soared to a record high last week.
You’ll either love or hate it.
If you are already invested, you are reaping the rewards with these gains. But if you’re not, then you may regret missing out.
But the question remains, what should you do now?
The 2022 market crash offers some clues:
“Here’s the key lesson: given time, share prices will align with the change in their FCF (free cash flow) per share, reflecting the management’s effort to grow the business.
The operative word here is time.
Three years have passed since the 2021 peak, providing ample time for the management to prove their worth. If they can grow the company’s FCF per share over this period, their efforts will eventually be recognised through a rising stock price.”
The right question is what you should focus on: the business, not the share price.
Since the 2021 peak, shares of Apple (NASDAQ: AAPL) have risen by 41% while Meta Platforms (NASDAQ: META) shares have climbed 71%. Nvidia takes the cake with a stunning 347% increase.
The returns are as of 9 November 2024, when the article was published.
Get Smart: Onward together
As 2024 draws to a close, let’s celebrate the win.
At the same time, let us recognise that returns for one year to the next are not always going to exceed 20%. But instead of worrying over what will happen next, why not use that time to put together a list of stocks you would be happy to buy if the market corrects?
That way, you can choose to either invest a little today and wait for better value points or keep a list ready and act when the time comes.
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Disclosure: Chin Hui Leong owns shares of Apple and Meta Platforms.
