Here at the Fool, we are advocates of long term investing. As avid Foolish readers may know, investing for the long term could give you a greater chance of achieving the best investing returns. Lately, however, I have learnt of a disconnect between understanding the above – “best investment returns”, and executing upon it – “long term investing”, among the investors that I talk to. While folks generally understand that the premise of long term investing, same folks have struggled on executing the part on — “holding for the long term”. In essence, the question becomes: How do you…
Here at the Fool, we are advocates of long term investing. As avid Foolish readers may know, investing for the long term could give you a greater chance of achieving the best investing returns.
Lately, however, I have learnt of a disconnect between understanding the above – “best investment returns”, and executing upon it – “long term investing”, among the investors that I talk to. While folks generally understand that the premise of long term investing, same folks have struggled on executing the part on — “holding for the long term”.
In essence, the question becomes: How do you hold for the long term?
Finding courage to hold for the long term
Finding the courage to hold for the long term can be done in a variety of ways. I have three suggestions for the Foolish long term investor:
1. Smaller Positions
The coming share lot size change on 19 January 2015 would make most companies listed in the Singapore share exchange more accessible. For instance, shares of oil and marine conglomerate Keppel Corporation Limited (SGX: BN4) or utility and marine outfit SembCorp Industries Limited (SGX: U96) would be available for less than $900.
Beyond that, smaller lots would also allow the flexibility for the investor to own the exact amounts that he or she would be comfortable holding without selling. This point is worth highlighting. It is worthwhile for the private investor to only commit capital amounts that they are comfortable with (say $1,000) and be able to hold for the long term rather than to over-commit large amounts of capital (say, $10,000) which could cause the same private investor to feel uncomfortable at the first whiff of any share price drops. This discomfort can turn into an emotional albatross that induces investing errors in the future. There’s very little point in committing high initial amounts of capital if you are not able to hold for the long term.
2. Add to your share positions over time
With the accumulated knowledge from holding a company, the private investor may subsequently find the courage to add to their positions over time. If the company turns out to be a multi-year winner like pan-Asian retailer Dairy Farm International Holdings Ltd (SGX: D01), the private investor will have plenty of time to add capital to the company in the future.
3. Make decisions based on business developments, not share price movement
If you bought shares of a company, and it subsequently tanks — the best antidote would be to read up on the business developments that may have caused the share price to fall.
A share price fall does not immediately mean that you have made an investing error. If there is nothing permanently damaging the business, the best course of action could be to wait it out for another three months to six months until the company reports its next earnings. The key here is to keep focusing on the business behind the ticker. The share price movements in between reporting quarters are likely to be random and unpredictable.
Foolish take away
It is worth repeating the words of investing maestro, Peter Lynch:
“People want instant gratification, but that’s a guaranteed way to lose money in stock investing. From one year to the next, the stock market is a coin flip: it can go up or down. The real money in stocks is made in the third, fourth and fifth year of your investment, because you are participating in the company’s earnings, which grow over time.”
In simple terms, the share price movements between the first and second year are likely to be random and unpredictable. Foolish investors are better served if they strive to hang on to their shares for at least three to five years. I repeat: at the very least!
If Foolish investors can find the courage to hang on for the long term – it could lead to the desired long term returns, and crucially, invaluable long-term lessons. New investors may not realize this yet, but it is in these long-term lessons that can be applied forward that would make you an even better investor.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.