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Holding Stocks For A Long Period Works – Here’s Why

We at The Motley Fool Singapore received a brilliant question from a reader during our recently-concluded Ask A Foolish Question exercise. The reader asked:

You have always prescribed to buying good stocks and holding it for a long period. I think that is a good strategy. Seeing a good stock increasing in value over a couple of years is an encouraging thing, but the frequency of market crashes has been increasing and repeating every 3-5 years.

This wipes out whatever gains I have and my portfolio could even go into the red. So, does it mean that I have to sell it before a market crash, and re-buy the stock when the market is deemed to be at its lowest? In this way, I don’t think it’s the same strategy as “holding the stock for a long period.”

In essence, the reader’s asking if he/she should be timing the market (which is the act of selling in anticipation of a market crash and buying back in when the market’s deemed to be rising) instead of buying-and-holding shares of great companies given the impression that market crashes have become more frequent.

As I said earlier, it’s an excellent question and a thoughtful one at that. But, the premise of it rests on the implicit assumption on the ability of a stock market participant to know ahead of time just when the market would crash.

There are perhaps many stock-market prognosticators who purport to be able to foresee market declines. But the hard truth is, humans are just bad at predictions of all kinds, including those related to the stock market. And, the experts can’t help us either.

That’s not to say that there isn’t any value to be had for investors who want to keep a cash cushion just in case the market crashes so that they can take advantage of it.

The actual problem comes when market participants overdo it by trying to time the market instead of keeping a slight cash-hedge and end up paying a huge price in terms of sub-par returns. That’s what happened to a large number of American investors from 1983 to 2012.

So, given the fact that we’re largely blind oracles who happen to have a collectively poor record of able to forecast important coming-events, the best thing we can do, is to let time be our ally which has certainly been shown to be effective.

For example, historically, the longer we stay invested in the Straits Times index (SGX: ^STI), the lower the odds of us losing money (hint: the difference in the odds can be huge).

Moving on to the impression of an increasing frequency in market crashes, there’s perhaps some truth to it, given the behaviour of the STI over the past 13 years or so.

The STI had fallen by 53% from 2,583 points on 3 Jan 2000 to 1,214 points on 10 March 2003 as a result of the dot-com bubble bursting. Then, the index climbed 220% to peak at 3,876 points on 11 Oct 2007 before free-falling to 1457 points on 9 March 2009 because of the Great Financial Crisis. The STI subsequently rebounded, eventually more than doubling to 3,212 points as of 24 Sep 2013.

That has been one heck of a roller coaster for the index. But, let’s see how the shares of some particular companies actually fared throughout the index’s rough ride:

Company 3 Jan 2000* 24 Sep 2013 Gain
Dairy Farm International Holdings (SGX: D01) US$0.79 US$10.03

1170%

Jardine Cycle and Carriage (SGX: C07) S$4.46 S$36.70

723%

Vicom (SGX: V01) S$0.65 S$4.89

652%

Raffles Medical Group (SGX: R01) S$0.71 S$3.18

348%

Oversea-Chinese Banking Corpation (SGX: O39) S$3.21 S$10.39

224%

*Prices on 3 Jan 2000 are adjusted for stock-splits and dividends that are received

Source: Yahoo Finance

The five companies shown are just some that have managed to grow their assets, sales, profits, and cash flows over the years and their share prices eventually reflected their business fundamentals by doubling and more.

Investors in these businesses at the start of 2000 would likely have been very satisfied with the eventual outcome after holding on for more than 13 years, despite the two market crashes that occurred in the interim.

With long-term results such as those shown above, it makes a strong case for pointing out that investing is not so much about avoiding market crashes and investing only at the bottom (which is very hard to do, given our general lack of ability in timing the market), but in picking out great businesses that can we can buy and hold for years to come.

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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 owns shares in Raffles Medical Group.