Many investors dream of discovering the Holy Grail to successful investing.
They hope to discover a foolproof method that tells them which stocks to buy and which ones to avoid. Or find a way to guarantee profitable results.
But in today’s world, where information travels fast and far, any method that works well will soon be copied by others.
In the past, having access to corporate information was a valuable edge for investors. But now, with the internet, anyone can get the same information easily.
So, how can you gain a lasting edge over other investors?
The answer may surprise you.
By investing for the long term, you can benefit from the power of compounding and avoid the noise of short-term fluctuations.
Most investors lack the patience and discipline to hold on to their stocks for years.
But if you can do that, you will have a rare and powerful edge.
Buy and hold is dead
Many investors today are too quick to sell their stocks.
A Reuters analysis of New York Stock Exchange data shows that the average time people hold their shares is only 5.5 months.
This is a big change from the past.
In the 1950s, investors kept their shares for eight years on average.
It begs the question: what makes investors so impatient today?
Technology and zero trading costs are partly to blame.
With smartphones and the internet, buying and selling stocks is as easy as tapping a button.
And with many brokerages offering free trades, investors don’t have to worry about paying commissions.
To make things worse, analysts from these brokerages often give one-year price targets for stocks.
This encourages investors to focus on the short term and to trade more often.
While it sounds easy to follow, trading is not a good way to invest.
Businesses need time to grow
When you buy a stock, you are not just buying a piece of paper or a number on a screen.
You are buying a share of a real business that sells products and services.
In essence, you want to buy stocks that can grow their businesses over time.
And as an investor, you want to hold on to them for as long as possible.
Warren Buffett, one of the world’s greatest investors, once said: “If the business does well, the stock eventually follows”.
That means you need to give time for the business to do well.
And when it does, you will be rewarded with a higher stock price.
Let me give you two examples of stocks that have done well over time.
One is Sheng Siong (SGX: OV8), a well-known supermarket chain in Singapore.
Sheng Siong started with 33 stores in 2013 and now has 69 stores in 2023.
That’s more than double the number of stores in 10 years.
But that’s not all.
Sheng Siong also grew its sales and profits.
The company’s sales went up from around S$637 million in 2012 to S$1.34 billion in 2022.
Meanwhile, profits went up from less than S$42 million in 2012 to over S$133 million in 2022.
That’s more than double the sales and more than triple the profits in 10 years.
And what happened to Sheng Siong’s stock price?
It went up from S$0.53 in 2012 to S$1.65 in 2022.
That’s more than triple the price in 10 years.
Another example is Haw Par Corporation (SGX: H02), a company that makes Tiger Balm, a famous pain relief product.
Haw Par’s healthcare business, which houses Tiger Balm, grew its sales and profits too.
Segment sales went up from S$92 million in 2012 to over S$164 million in 2022.
At the same time, the business unit’s profits went up from around S$17 million in 2012 to over S$40 million in 2022.
That’s almost double the sales and more than double the profits in 10 years.
And what happened to its dividend and stock price?
You guessed it.
Haw Paw’s dividend went up from S$0.20 per share in 2012 to S$0.30 per share in 2022.
Meanwhile, the Tiger Balm maker’s stock price went up from S$6.11 in 2012 to S$9.58 in 2022.
That’s a 50% increase in dividend and a 57% increase in price in 10 years.
These two examples show you how investing for the long term can help you make money from stocks.
You need to buy good businesses and hold on to them.
Don’t be tempted to sell them too soon.
Give them time to grow and reward you.
Extending your time horizon
To be sure. not all stocks are good to hold for the long-term.
You need to look for stocks that have these qualities:
1. The business has a strong competitive advantage that allows it to outshine its rivals.
2. There is a good management team in place to run the business well and grow it further.
3. The business should also have a favourable outlook that can support its growth for many years to come.
These are the stocks that can compound your wealth over time.
As their profits grow, they can also pay you higher dividends.
But you need to be patient and disciplined to hold on to these stocks.
Stock prices can go up and down in the short term for many reasons.
Don’t let these near-term fluctuations scare you.
Stick to your long-term plan and focus on the business performance.
A simple rule of thumb applies.
If the business is still growing its sales and profits, you should keep holding its stock.
By investing for the long term, you can have an edge over other investors who are too impatient or too busy to do so.
Many of them are hedge funds or unit trusts that have to report their results every month or quarter.
They have to buy and sell stocks often to please their clients and justify their fees.
But you don’t have to do that.
You can just sit back and watch your stocks grow.
All you need is courage and emotional control to stay the course and make sure the business is still doing well.
Get Smart: Holding out for a long holiday every year
A friend of mine once asked me to sell my entire holdings in a profitable stock so that I could use the money to enjoy a nice holiday.
I countered by saying that if the stock did well and increased its dividend over the years, I would receive enough dividends to be able to take a long holiday every year.
Rather than selling the stock and pocketing the profits, I chose to hold on to it as I believed the rewards would be well worth the wait.
Sounds too good to be true, right? But it is possible, if you follow one simple rule: stay the course.
When you invest in a high-quality company, you should not sell it even when the market is down or the business faces challenges.
You should trust that the company will overcome the difficulties and emerge stronger.
This is the advantage you have as a long-term investor.
But you need to resist the temptation to sell your stock early or to chase after the next hot idea. If you do so, you will miss out on the potential rewards of your investment.
So, the next time someone tells you to sell your stock and go on a holiday, think twice. You might be better off holding it for the long haul.
I promise that if you do so, you will find that the eventual rewards are well worth your effort.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.