Invest For the Long-Term – It’s Your Best Bet

About a week ago, my colleague David Kuo pointed out how tough it is for investors to invest based on short-term predictions. In his words, “it is nigh on impossible to predict what shares might do in the short term.”

I agree with him. One of my favourite examples concerning the futility of short-term predictions in the financial markets comes from the following table, which I’ve shared in a previous article:

Prediciton for S&P500

Source: Business Insider

So, what the table shows are the predictions made at the start of 2013 on where the S&P 500 (a broad US share market index) would end up by the end of that year. And as you can see, the analysts from all the big and renowned financial institutions (banks and investment firms) were considerably off-target, some wildly so.

I’m not trying to ding the undoubtedly smart and hardworking analysts there – I’m merely trying to point out how difficult it really is for investors to invest based on short-term predictions. If these analysts – with all the resources at their disposal in big name firms – can’t do it, what hope is there for individual investors like you and me?

So, instead of worrying about where a company’s shares might be over the next six to 12 months, why not think hard about how the company’s business might progress over the next, say, three to 10 years or beyond? If the business is likely to do well years into the future and its shares are reasonably priced now in relation to its future prospects, then chances are its share price will be materially higher over the long-term.

Now, some of you might be thinking, “How can you make long-term predictions if you can’t even handle short-term ones?” Well, investor Jeremy Grantham from the asset management firm GMO once gave a great answer in Maggie Mahar’s book “BULL! A history of the boom and bust 1982-2004”:

“Think of yourself standing on the corner of a high building in a hurricane with a bag of feathers. Throw the feathers in the air. You don’t know much about those feathers. You don’t know how high they will go. You don’t know how far they will go. Above all, you don’t know how long they will stay up… Yet you know one thing with absolute certainty: eventually on some unknown flight path, at an unknown time, at an unknown location, the feathers will hit the ground, absolutely guaranteed. There are situations where you absolutely know the outcome of a long-term interval, though you absolutely cannot know the short-term time periods in between. That is almost perfectly analogous to the stock market.”

Grantham was using the above anecdote in a slightly different context (he was trying to forecast a market crash during the dotcom bubble of the late 1990s on the premise of the market being extremely overvalued when he had those words), but it’s also very valid when it comes to thinking about how investors should invest for the long-term.

I wouldn’t use terms such as “absolutely guaranteed” here as there’s nothing that’s certain in life (besides taxes and death, that is), but to quote Warren Buffett, “If the business does well, the stock eventually follows.” Of course, the reverse is also true – if the business does poorly, the stock eventually sinks too.

For those who might need some convincing with numerical figures, check out the following table regarding the biggest winners in Singapore’s share market from 1 January 2004 to 1 June 2014. These shares include Ezion (SGX: 5ME), United Overseas Australia (SGX: EH5) and MTQ Corporation Limited (SGX: M05).

Share price and profit growth table

Source: S&P Capital IQ

Similarly, shares such as Surface Mount Technology (Holdings) Ltd. (SGX: Q7Q) and Metech International Ltd (SGX: QG1) have been massive losers since the start of 2004 – both have seen their share price decline by more than 99% – simply because their profit have shrunk beyond recognition. For instance, Surface Mount Technology had earned S$1.46 per share in profit at the start of 2004; today, its profit has shrunk to 0.527 cents. With Metech International, the magnitude of its profit decline is even worse.

Foolish Bottom Line

So, would you rather invest knowing that your chances are no better than a coin-flip (as it is when you invest based on short-term predictions), or would you prefer to invest knowing you can stack the odds in your favour (as it is when you invest for the long-term, knowing that a share’s price would eventually reflect the strength of its underlying business)?

I know where I stand. What about 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 writer Chong Ser Jing doesn't own shares in any companies mentioned.