Wouldn’t it be wonderful if it was possible to devise an investing strategy, which is so close to optimal, that it would be impossible to lose money over the long run? It almost sounds like the kind of stuff that dreams are made of. But it seems that something approaching that fantastic outcome has been achieved in the game of poker, at least. Apparently, a bunch of clever boffins have devised a computer program – as near to mathematical perfection as possible – that cannot lose. Win-Win According to reports about the computer code, regardless of whatever cards an opponent…
Wouldn’t it be wonderful if it was possible to devise an investing strategy, which is so close to optimal, that it would be impossible to lose money over the long run?
It almost sounds like the kind of stuff that dreams are made of. But it seems that something approaching that fantastic outcome has been achieved in the game of poker, at least.
Apparently, a bunch of clever boffins have devised a computer program – as near to mathematical perfection as possible – that cannot lose.
According to reports about the computer code, regardless of whatever cards an opponent might hold, the worse possible outcome for the computer is to break even.
Some excited eggheads have even gone so far as to suggest that the poker-playing program could be applied to cybersecurity, medicine and even business negotiations.
But before we get too far ahead of ourselves, it has to be said that the playing conditions have to be near perfect for the algorithm to work.
Firstly, only two players are allowed to play at any one time, namely the computer and a human. Secondly, the size of bets and the number of permitted raises are capped. In other words, the human player is not allowed to do anything too bizarre, too unusual or too out of the ordinary.
It is easy – or perhaps it might just be wishful thinking – to read across from the incredible cyber achievement to wonder if a near-perfect algorithm can ever be devised for investing in the stock market too.
Imagine owning a computer program that would allow us buy shares in the knowledge that we could make money every time. It would be almost as good as getting hold of a copy of tomorrow’s newspaper, today.
Unfortunately, no one has ever come up with an investing strategy approaching anything as smart as that. Well, at least not anything that would not land us behind bars.
However, all is not lost. There are many investing strategies that still work remarkably well over the long term.
Double your money
Passive investors, for instance, can mirror the performance of the Singapore market through a couple of low-cost Exchange Traded Funds.
These passive funds will mimic the ups and downs of the Straits Times Index (SGX: ^STI). So, when the index rises, the value of the fund goes up proportionately. And when the index falls, the value of the fund will go down too.
Over the last ten years, the Spider Straits Times Index ETF (SGX: ES3) has delivered a total return of around 8.5%. It means that S$1,000 invested in the fund would have turned into S$2,260 after a decade, provided dividends were reinvested. Put another way, we could have doubled our money.
The fund would provide immediate exposure to sectors such as banks, real estate, telecoms and transportation. This is one of the main attractions of passive investing through an index tracker, namely, diversification.
Beating the index
But guess what? Active investors could have fared better. No fewer than 20 stocks that make up the benchmark have delivered higher returns than the index. Additionally, 25 of the 30 stocks that have been listed for at least a decade have delivered total returns of at least 5.2%.
There is a valuable clue in there for us. It is to buy and hold good shares for the long term. It is such a no-brainer.
Businesses that can consistently deliver above-average returns on shareholder funds, should, over the long haul, reward them with decent returns on their investments.
An ample Return on Equity means that surplus funds can be invested to improve the business, without shareholders having to stump up more capital.
A grapefruit’s squirt
Mind you, anything could happen over the short haul. In the short term, the stock market can be as unpredictable as a grapefruits’ squirt. But over the long term, companies that can consistently deliver above-average returns for shareholders should outperform the market.
So rather than look for quick wins, spend time, instead, looking for good companies that can consistently deliver high returns over the long term. It is as close to a no-lose strategy that you will find.
A version of this article first appeared in Take Stock Singapore.
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