I was browsing for investing books at a book shop with a loved one recently when we started talking about investing. She asked me, ‘What exactly is value investing?’ After explaining the concept of buying a dollar for fifty cents, she followed up with, ‘Seems like the hardest part about investing is determining what the value of a company is.’
That’s when it dawned on me that, perhaps, not many might be aware that the hardest thing about investing isn’t learning how to read financial statements and work the numbers. To me, the hardest thing that investors face is having the discipline to stay the course.
You see, while almost every bona fide investor knows that patience and time is needed for an investment to work, it’s not easy at all to see an investment you’ve made go deep in the red, even though you’ve bought it at what was presumably a good value.
Our emotions, as ascertained by behavioural economists and other academics of similar ilk, can wreak havoc with our attempts to think rationally. When a share we’ve bought goes down for extended periods of time, fear can set in and we start questioning our own judgement even if we know we’re utilising a great process with the long-term odds stacked in our favour.
It’s not just me who thinks that staying the course is perhaps the hardest thing about investing.
Famed hedge fund manager Joel Greenblatt wrote about the difficulties faced by even professional investors in his book The Little Book That Still Beats The Market that (emphasis mine) “The unpredictability of [the stock market] and the pressures of competing with other money managers can make it really hard to stick with a strategy that hasn’t worked for years.”
He goes on to add that (emphasis mine), “That goes for any strategy no matter how sensible and regardless of how good the long-term track record is.”
Historically, the Straits Times Index (SGX: ^STI) has been shown to have dramatically lower odds of losing money for an investor the longer he stays invested. So, that’s a good reason to extend one’s time horizon when it comes to investing in the STI through index trackers like the SPDR STI ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B).
But, an investor’s resolve can get tested severely, especially with how common it can be – almost 30% of the time, in fact – for the index to decline by more than 20% from an annual-peak in each calendar year.
The same goes for individual shares. Shares of companies tend to do well when their earnings improve. As billionaire investor Warren Buffett says, “If a business does well, the stock eventually follows.”
Shares like those of conglomerates Jardine Strategic Holdings (SGX: J37) and Jardine Matheson Holdings (SGX: J36) have done exceedingly well over the past 10 years since Jan 2003 with total returns of close to a 1,000% or more. Along the way, their profits and dividends have also grown manifold from Jan 2003 onwards.
But, despite the great long-term success of those two shares, they also had their periods where they would likely have tested the mettle of investors. During the Great Financial Crisis of 2007-2009, both shares dropped by more than 50% from their pre-crisis peaks to their respective troughs.
Simply said, it’s very common to experience temporary but significant losses in shares over shorter spans of time, which might cause an investor to buckle-in and give up, even if he had previously set his sights many years into the future in a genuine attempt to reap the full benefits of long-term investing.
Foolish Bottom Line
Understanding the numbers and nuts and bolts of valuing a business is not exactly rocket science. It’s not that tough. But, staying the course when it comes to investing might be the emotional-version of ‘rocket science’.
It’s not easy to stare temporary losses in the face (assuming of course, that the investment was being valued appropriately in the first place). It might even be the hardest thing about investing.
But long-term investing is what we believe in at The Motley Fool Singapore and it is also a cornerstone for the phenomenal success experienced by professional investors like Buffett, Greenblatt, Peter Lynch, Shelby Davis, Philip Fisher and so many others.
That’s why it’s important for you (or anyone else for the matter), as an investor, to really make an iron-clad commitment to yourself to stay the course.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.