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3 lessons every investor should take from 2016

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George Santayana is famous for the quote: “Those who cannot remember the past are condemned to repeat it”. While George wasn’t specifically referring to the ASX, both new and old investors are wise to heed his advice and regularly review both their successes and failures.

With this in mind here are three lessons I believe investors should take from 2016:

1. No, you cannot predict the future

At the start of 2016, The Royal Bank of Scotland advised its clients to sell everything and head for the hills predicting a cataclysmic year for markets. Unfortunately for the Royal Bank of Scotland’s creditability, share markets continued to head higher. Next Brexit arrived with similar dire predictions, yet a few weeks later markets happily headed even higher. If you still think you can predict where share markets will head, I present my third and final piece of evidence, Donald Trump. Throughout the US election, we were told gold would be our only friend if Donald Trump became the leader of the free world. Yet again the forecasters were wrong with share markets up and gold producers such as Northern Star Resources Ltd (ASX: NST) falling heavily.

2. No, the Price to Earning ratio (PE) has not gone out of style

Many investors in 2016 became swept up in market excitement paying high prices for companies trading on very high price to earnings ratios. While the PE ratio is hardly a foolproof indicator, it does tell investors how much profit they are getting for every dollar they outlay for shares. While the market rewards companies it expects strong profit growth from, it is quick to also punish companies that disappoint. Shareholders of Bellamy’s Australia Ltd (ASX: BAL) will be only too alert to this fact.

3. Yes, dividends are still important

While it is true a company does not need to pay dividends to make it a good investment in general, it is a signal for investors that the company is actually making a profit. Investors new to the share market should look for companies paying dividends as a mark of a profitable company. From there I suggest working backwards to understand what percentage of profit is being paid out as dividends and if the dividends are sustainable. 2016 saw profitable companies such as Retail Food Group Limited (ASX: RFG) fall out of favour with the rush into fast-growing small caps which presented an opportunity for astute investors.

If you’re keen to learn more about investing, I can suggest no better teacher than the legendary investor Warren Buffett.

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Motley Fool contributor Alan Edmunds owns shares of Northern Star Resources Limited and Retail Food Group Limited. The Motley Fool Australia owns shares of Bellamy's Australia and Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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