2016 was a tumultuous year for markets. Trading kicked off in January with a spectacular meltdown as fears over China's economy rippled through bourses across the developed world. Then we had Brexit and Trump's election victory, which sent markets violently whipsawing up and down. However, while the volatility was nerve-wracking when looking at my brokerage account, I must admit this year did teach me several important lessons.
Don't trust the pundits
This is an obvious one but the poor track record of financial prognosticators in 2016 compounded the wisdom of the Motley Fool's long-held advice to ignore the talking heads and focus on fundamentals. Although many were right when they predicted a drop in equity markets immediately following the Brexit vote, few forecast the FTSE 100 racing ahead to end the year near all-time highs. Likewise, the smart money was on a catastrophic collapse in stock prices should the unthinkable happen and Trump win the presidency. Yet here we are now with a Trump-led rally sending American indices to record highs.
How should we apply this lesson in the year to come? Personally, I'm doubling down on fundamental research and focusing on what makes companies tick. Rather than cycling between this quarter's 'hot' or 'cold' sector, I'm ignoring the financial personalities and thinking about companies' competitive advantages, long-term outlooks and valuations.
Be more contrarian
What I wouldn't give to go back to the beginning of the year when mining and oil companies were being battered by analysts' predictions that low commodity prices and high debt would spell doom for many major players. I thought Rio Tinto was a steal back in February when shares were £20, but I didn't pull the trigger because I was worried about going against the grain. Of course, we all know what happened in the months since. Commodity prices stabilised, debt fears subsided and Rio shares promptly jumped to over £30.
How has this influenced my investing habits? Well, I must say that I'm taking a very sceptical view towards the current rally in banking and construction companies with large US presences. Shares of companies such as Barclays have gained over 30% since before the US election due to analysts' high expectations for massive tax cuts, financial de-regulation and a huge infrastructure investment programme. These reforms may yet come to pass, but nothing has changed for Barclays' fundamental outlook, so I remain wary that the market may be getting ahead of itself.
I don't at all mean anyone should be trading based on election outcomes or what politicians promise during election season. But 2016 did bring into focus for me the importance of one major aspect of the political system - regulation. Whether it was the crackdown on spread betting firms' margin practices, the FCA mandating further capital buffers for asset managers, or MPs call for further restrictions on fixed-odd betting terminals, the ability of politicians to influence companies' performance was on full display in 2016.
My takeaway from this lesson is that investors should be wary when investing in sectors that are easy targets for public ire. Going into 2017 this means I'm taking a more conservative outlook towards pharma firms such as Shire given the increasing scrutiny of the astronomical prices charged for life-saving drugs.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.