How to Really Build Long-Term Wealth

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American billionaire investor Warren Buffett once shared how a US$40 investment into a single share of soft-drinks maker Coca-Cola in 1919 could be turned into more than US$10m today.

I recently chanced upon another anecdotal story on the power of long-term investing and how one can turn a US$10,000 investment in the 1970s into US$160,000 today. The solution? One of America’s oldest stock market indices, the Dow Jones Industrial Average (DJINDICES: ^DJI).

New York University’s professor of history of financial institutions and markets, Richard Sylla, recently shared with The Wall Street Journal on how he managed to build up a formidable retirement nest egg by investing in the Dow back in the early 1970s when he was in his twenties.

Sylla’s employer back then offered a retirement-savings plan. At that point in time, there were new developments and evidence in finance that pointed to how stocks would outperform fixed-income instruments over the very long-term. Thus, given a choice between stocks, fixed-income, or a blend of both in the savings plan, Sylla chose to go 100% into stocks given that he had decades to invest before he reached the retirement age of 65.

When he started the retirement plan in the early 1970s, the Dow was under 1,000. Today, it sits above 16,000, or 16,463, to be exact. And in his own words, “when I retire in a couple of years and have to take minimum required distributions from my retirement account, I’m pretty sure my income will be higher than it is now,” bearing in mind that he’s a “well-compensated professor.”

There are lessons in there for us all from Sylla’s experience.

First, is the power of having patience and a long-term view toward the stock market. In the four-plus decades since the start of 1970, the USA has endured serious turbulence in the financial markets.

There was the 1973-1974 bear market, where the Dow fell by almost half from peak-to-trough; the October 1987 Black Monday event, when the Dow lost more than 20% in a single day; the crash of the Dot-com bubble in the early 2000s, which dragged the Dow down by 30% or so from its speculative top; and of course, the Great Financial Crisis of 2007-2009, which caused the Dow to plummet from 13,900 to a smidge above 7,500.

But here’s the kicker. Even if Sylla had invested at the peak of the Dow at 1,051 points before the 1973-1974 bear market came mauling, he’ll still be sitting on gains of 1,500% after close to four decades of investing. America’s multitude of crisis…? What crisis?

The second lesson relates to one other key facet to Sylla’s decision making when he chose to go all-in into stocks for his retirement savings plan. He said, “What made the decision… [to go 100% into stocks] easy was that… we couldn’t touch the money until we retired, presumably about four decades later when we hit 65.”

And that’s the crucial thing – the fact that Sylla couldn’t touch his money for decades. Behavioural investing expert Carl Richards often uses the term the ‘behaviour gap’ to explain the difference between investment returns and investor returns.

What this meant was, an investor in the Dow could still have gotten abysmal returns from the 1970s onwards – even though the Dow had blockbuster gains – because of poor investing behaviour related to say, selling out at big losses during market panics due to fear.

In Sylla’s case, it could reasonably be inferred that he was cautious about how he would have reacted in times of market crashes if he could have easily shifted his money about. The fact that he was legally bound to his investments through thick and thin prevented him from making stupid mistakes.

That’s a really important takeaway for us investors: We have to put into place certain systems that prevent us from committing silly investing-related mistakes.

And, a good way to do so, would be to have an investing journal where we pen down our thoughts on each investment we make. We can include the purpose of us investing, how long we’re investing for, business-based reasons for a particular investment, and business-based reasons for selling any particular investment. Putting all these down onto paper (or the computer) helps us infuse more logic into our thinking process and minimises the financially-harmful effects that our emotions can cause.

Foolish Bottom Line

In short, Sylla’s amazing story teaches us two important lessons: 1) A long-term view toward the stock market gives an investor great odds of success, and 2) A solid system put in place to encourage long-term investing can go a long way in helping produce great returns.

Over the past 22 years since the start of 1992, our local stock market stalwarts like Jardine Cycle & Carriage (SGX: C07), United Overseas Bank (SGX: U11), Singapore Press Holdings (SGX: T39), and Keppel Corporation (SGX: BN4) have delivered tremendous total returns for shareholders. Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), has also more than doubled.

Company 2 Jan 1992* 8 Jan 2014 % Change
Jardine C&C S$2.62 S$36.5 1,295%
UOB S$1.89 S$21.10 1,015%
SPH $0.38 S$4.01 954%
Keppel Corp S$1.11 S$11.22 911%
Straits Times Index 1,479 3,151 113%
*Except for the Straits Times Index, prices on 2 Jan 1992 are adjusted for dividends, stock splits, rights offerings, and spin-offs.

Source: S&P Capital IQ; Yahoo Finance

If you’ve invested in any of those shares back in 1992, have your subsequent returns been better? If not, take a leaf out from Sylla’s playbook and don’t ever let the behaviour gap beat you at the investing game again.