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The Israeli stock market is proving itself over time

In the long run, the local stock market has managed to provide investors with a positive real return and higher than government bonds. What can be done to enjoy the full return that the market provides?

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• The Tel Aviv Stock Exchange

Deer Stepak

Monday, 26 October 2020, 07:21

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Although the Tel Aviv stock market has lagged behind the main stock markets in the world in recent years, in a long-term perspective, the local market also has nothing to be ashamed of.

The stock market in Israel has also proven itself over time.

For example, an examination conducted over 25 years, from 1980 to 2005, shows that the TA-100 index achieved an average annual real return of 9.5% during this period. This is a yield that far exceeds the yield on the government bond market, as well as The investment in apartments.

And not that during those 25 years there were no stock market problems - not to mention, avalanches. Inflation at the beginning of the period was high in double digits, and by means of high double digits, and only towards the end did it fall to single digits. "free" in January 1983, an avalanche Bank shares in October of that year, the collapse of the credit bubble of 1994 and the collapse in 2001, and especially in 2002, against the backdrop of the second intifada and the management of economic policy is wrong.

a survey conducted by the Tel Aviv stock Exchange (February 2019) as part of a campaign Its encouragement to the public to invest in the stock market, it emerged that in the 20 years between 1998 and 2018, the TA-35 and TA-125 indices yielded a positive return of 375% and 345%, respectively - far more than the world's leading stock indices.

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The Tel Aviv Stock Exchange stabilizes on the green (Photo: Reuven Castro)

Lack of discipline and lack of perseverance in investing

However, to her and a thorn in her side.

There are quite a few studies conducted around the world, especially in the US, and a few tests conducted in Israel as well, which indicate that even during prolonged periods of stock market tide, investors are far from achieving the returns provided by market indices.

For example, a study examining annual returns The average of the S&P 500 in the 20 years between 1986 and 2005 showed that it reached 12% - certainly an impressive return, but the return of private investors on their investment in S&P 500 shares was a third of that, about 4%. lack of discipline and lack of diligence on the part of investors.

the thought of many investors is that they know how to time the market - when to enter the market and when to get out. This is a delusion. it might make a good ego, but to do with the reality that, and it makes bad investment portfolio.

investors do not They learn to act calmly. They are often caught in fear, and sometimes panic. Fear of loss drives them, and they, in crisis situations, sell everything nearby. Those investors will be very pleased if and when they realize that the stocks they sold continued to decline, as proof of ability. Their timing, but they will not take advantage of the declines to buy at a lower price the stocks they sold, but will wait

And for more declines.

And meanwhile, stocks are recovering and investors need time to get back and gain confidence, and by the time they get it, the stock prices they have sold are already higher than their selling price.

It happens a lot as a routine phenomenon, and it happens a lot, only at a much greater intensity, when there is a real avalanche in the markets.

How many investors who rushed to sell stocks in the 2008 crisis, even in its early stages, returned to investing when the market was lower than the point at which they sold, and how many did so when the market was higher?

The answer is clear.

Statistics separately and profits separately

An Israeli example of stock market statistics separately and investor profits separately is a survey conducted at Psagot Investment House in 2007, which examined what the Israeli stock market (then, the Tel Aviv 100 Index) did in the decade between July 1996 and June 2006, and what investors in mutual funds do. The

test results were published in May 2007 in TheMarker newspaper in a column written by Meirav Arlozorov, entitled "Losing NIS 4.3 billion in a market that rises by 300%," and in a previous column published in April 2007, entitled "Want to lose?

Buy the winning fund of the year. "The

Tel Aviv-100 index achieved a cumulative return of 301% in the decade examined by Psagot, although along the way it experienced quite a few difficult years, especially in 2001 and 2002.

Its average annual return was about 15%.

And what about the investors - did they achieve that return?

Not only did they not achieve it, but they even lost, and a lot - a 55% loss on their investment.

And why did they lose?

Not because of the failed performance of the mutual funds they acquired, but because of a lack of discipline and lack of perseverance.

Those investors often entered the market and also came out of it through mutual funds, and hurried to purchase the winning fund of the year, of the month and the like - what was called in those days "the fund with the star".

In this way, they actually sabotaged their return.

In contrast, investors who persisted in their investment for 10 years through several equity mutual funds, more or less achieved the very impressive return provided by the market.

I will only remark that conducting such a test is not a simple matter, and I do not endorse the findings as they are, but the phenomenon itself - a rising market and investors losing, or earning much less than the market allowed them to earn - is a familiar phenomenon, even without testing, to anyone involved in the market decades.

For comparison: in the same decade (1996-1996), the American stock market achieved half the return of the Israeli stock market - and the American investor earned half of that, compared to the Israeli investor, who apparently lost.

The bond volatility is much lower

This phenomenon of an emerging market that provides high positive returns, and at the same time, modest profits for investors, or, God forbid, losses, is not necessarily limited to the stock market. There is a similar phenomenon in the government and corporate bond market. Less powerful, because volatility in these markets is much lower than in equities.

Apartment prices can go up and down, but investors will not care.

Securities, on the other hand, create panic (Photo: Reuven Castro)

The most convenient way to find out is by examining what is going on in mutual funds.

In a period of tide in one of these two markets money enters, and a lot, into the outstanding funds and the entry intensifies as the tide continues.

That is, the money that goes into the initial stages of the tide is little, and is the one that enjoys the full return of the outstanding fund, while the money that goes into the final stages of the tide and success, "just" before the fund starts to indicate a negative return, is big money.

Thus, the result is that even after the decline in mutual fund exchange rates, its overall return is still positive, and even perhaps high, but only a few have benefited from it, while most of the money that has gone into it has lost.

This phenomenon of positive return and losses for investors, at the same time, in the same period of time, is difficult to understand, but a glance at the profit and loss statements of the funds indicates many such cases.

It stems from the inflow of funds into mutual funds at their peak and their exit at a low, without the fund manager having control over it.

Then, "a magic act", the fund presents in its annual report a positive return, along with a financial loss, which represents the total loss of the investors in the fund.

If so, what is the way to overcome our human weaknesses and the tendency to react quickly to any knowledge, right or wrong, positive or negative, and the futile attempt to time the market?

The answer is that anyone who is not equipped with the patience needed for a long-term investment, should act in the way of standing orders - a regular monthly / quarterly investment, in the sense of "live and forget".

In this way, the investment will be made both in periods when the market is expensive, but also in periods when the market is particularly cheap, and especially in periods when the market is traded at a more or less reasonable price level, these are the most common periods.

Thus, the cumulative return of the investor will be less subject to market fluctuations, and also less to fluctuations in his mood, and thus he will impose investment discipline on himself.

The exact timing of any specific monthly investment loses meaning in such a framework.

The basic problem is the lack of financial education that should instill in investors' minds the insight that buying stocks is indeed an investment, no less than investing in real estate - apartments for investment. It is difficult for people to accept this, as an apartment is something tangible that can be touched. Stockholders do not internalize the insight that once they buy shares, they buy a share in the company and they share in its profits and growth.

Apartment prices can, of course, change and fall, but an apartment owner does not check the value of his investment every day. The shares change daily - and many of the shareholders (not all) are mentally incapable of meeting this volatility. The

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