Due to the nature of my job with The Motley Fool Singapore (yes, I know… we like to talk stocks all day!), I’m often being asked on what makes a good investment. After a while, I hope folks who talk to me often will not find me to be boring because my answer tends to be repetitive: find good quality companies with strong balance sheets and healthy cash flows; with a good management team in place with long tenure; and a solid long-term track record. But I also realised, just as often as I repeat my answers, I also tend…
Due to the nature of my job with The Motley Fool Singapore (yes, I know… we like to talk stocks all day!), I’m often being asked on what makes a good investment.
After a while, I hope folks who talk to me often will not find me to be boring because my answer tends to be repetitive: find good quality companies with strong balance sheets and healthy cash flows; with a good management team in place with long tenure; and a solid long-term track record.
But I also realised, just as often as I repeat my answers, I also tend to forget most of the time to mention – in my opinion at least – the single most effective advantage we, as individual investors, have going in our favour: Time.
My colleague over in the USA, Morgan Housel, thinks equally highly about the effects of time in investing too, according to an article he penned titled Your Last Remaining Edge on Wall Street.
And, he even has the data to back it up. Here’s a chart depicting returns for the S&P 500 Index (an American stock market barometer) he made for the article:
Here’s what he has to say (emphasis mine):
“Hold stocks for a year… and you’re at the mercy of the market’s madness – maybe a huge up year, or maybe a devastating loss. Five years, and you’re doing better. Ten years, and there’s a good chance you’ll be sitting on positive annual returns. Hold them for 20, 30, or 50 years, and there has never been a period in history when stocks produced an average annual loss.”
Measuring returns at the start of every month from 1988 to August 2013, if the index was held for a year, there’s a 41% chance of sitting on negative nominal (i.e. unadjusted for inflation) returns. Hold it for 10 years, and losses occurred only 19% of the time. Double the holding period to 20 years however – here comes the kicker – and there were no losses.
Simply said, the odds of making losses are dramatically reduced when our holding periods lengthen. I’ve mentioned it before, and I’ll say it again: Time can be a powerful ally in winning the investing game (maybe even the most powerful ally we’ll ever have).
The effects of time can also manifest itself in individual shares. Let’s take Jardine Matheson Holdings (SGX: J36) as an example.
The conglomerate, which directly or indirectly holds controlling stakes in other locally-listed companies like Jardine Strategic Holdings (SGX: J37), Dairy Farm International Holdings (SGX: D01), and Mandarin Oriental International (SGX: M04) among others, has been a decent winner in our local market with its shares up by 88% to its current price of US$52.06 since the start of 2008.
But for investors with a holding period of only 12 months back then, they’d have been sitting on a loss of 34.5%. It is only with time that Jardine Matheson’s underlying business fundamentals could shine through.
As important as selecting good shares are, there is often no substitute for the effects of time.
Foolish Bottom Line
Give stocks time, and they’ll like deliver satisfactory returns, as shown by Housel’s work with the S&P 500 index and my study with the STI.
Give good stocks enough time, and they’ll likely deliver smashing returns. Case in point: Jardine Matheson Holdings. The company ‘only’ gained 88% after more than five years since 2008, but stretch the holding period back to 2003 however, and its shares have jumped by 746% in just slightly less than 11 years.
In Your Last Remaining Edge on Wall Street, Housel asked: “You have the opportunity to focus on the long term. The question is, Will you?”
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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.