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Sunday, March 01, 2009

Long Term Investment


I do occasionally read the writings of Ooi Kok Hwa in the Star. Some I agree, some I do not. Anyhow, this week's article is interesting as I was looking for the data that he published. The table given shows the annual compounded return for various period. You can read the original article from the Star.

His conclusion:

.....we need to hold stocks long term. We may not need to hold them up to 10 years.

However, we need to understand that we will face very high volatility on returns if we invest only for one year.

Besides, we need to make sure that we are buying good fundamental stocks in order to avoid poor quality stocks that are not suitable for long-term investment.


First we must be cleared of the following facts:
  1. The return is based on a one-lump sum investment at the beginning period.
  2. The return ignores dividend received.
  3. The return ignores transaction fees (commission and tax).
I would like to add a few more things that we can say about the table:
  1. If your luck is not good, you are screwed. Why? The table only shows an investment for 10-year period. Usually, we start to invest around 30 years old (when we have enough excess money) and this goes on to 55. That means a 20+ years of investment. You can see from the table that your return varies wildly depending on when you start and stop investing. If you are lucky, you are able to withdraw your retirement fund during the bull market. What happens when you retire during the bear market? Yes, you are screwed! This means that timing is very important! Even Warren Buffett has admited that his timing for purchasing ConocoPhillips was terrible in his latest letter.
  2. Take your money out of the market when you have a windfall profit. For a 10-year period, the average annual compounded return is 8.1%. This means that your original capital has appreciated 118% in this 10-year period. So, if in a good year you have 100% profit, take it because statistically, the average return is only 8% compounded. This means that you do not always have to be invested in the market! If you do, you may lose most of your gains due to the "regression to the mean" effect.

1 comment:

Nazri said...

Nestle is the stock to go for long term. It produce one of the best financial results among all Bursa companies. Return on equity is consistently above 39%. PE ratio historically is around 20 plus plus.

People are willing to pay PE ratio of 30 times for a company like that. Dividend yield is better than putting in FD. Consistenly above 4%.

Business fundamental is very strong. People who drinks Milo every morning, will drink Milo every morning. There is no runner up in this business. Is either Milo or you drink coffee or tea. No other brand is stronger than Milo.

Furthermore, the price of the Milo goes up with inflation. ANd the consumer will never feel it.

Nestle has never issue more shares to expand their business. And therefore, the pie gets bigger for each shareholder. Unlike other companies which has to issue more shares to expand their business.

So, what are people waiting for?