Buying Stocks? Think Long Term

Foreword from ShareInvestor

This article “Buying Stocks? Think Long Term” by Goh Eng Yeow was first published in The Straits Times on 22 Mar 2015 and is reproduced in this blog in its entirety.

To really make money, investors should buy and hold, ignoring market volatility, perceived risks

When retired secretary Grace Groner died at the grand old age of 100 in the United States four years ago, she left her alma mater Lake Forest College US$7 million (S$9.7 million) to be used for scholarships.

Nothing special about that since there will always be people who will leave their wealth to schools or charitable organisations. What made Ms Groner’s gift astounding was that she was not a rich woman. She had lived frugally and lived in the same one-bedroom cottage most of her life.

Until she retired, she had worked for 43 years for the same pharmaceutical company. Her single stroke of financial genius was to buy three shares of the company which employed her – Abbott Laboratories – for US$180 in 1935. That investment multiplied over the decades to more than 100,000 shares worth US$7 million by the time of her death in 2010.

Although her “all-in-one” strategy horrifies financial experts who advocate the merit of a diversified portfolio of stocks when a person invests his nest egg, to me, it epitomises the power of compounding in one simple example.

Over her lifetime, Ms Groner did not sell a single share in her investment. Instead, she diligently ploughed back every cent of dividend into the same stock – and this helped to further multiply her rewards.

Some investors would consider it to be an outlier for her strategy of sticking to the same counter and staying lucky on it over such a long period of time.

But I observe that there are other older investors who had adopted similar tactics and enjoyed a similar measure of success – even though their returns were not as astounding as those achieved by Ms Groner.

One of them would be my 86-year-old father, who bought 1,000 shares in cigarette maker Rothmans of Pall Mall during the 1972 bull run, costing $3,000, after being given a “hot” tip by a colleague about an impending bonus issue by the company.

The bonus issue did materialise eventually. But unlike Ms Groner who held on to her stock, my father sold his original 1,000 shares for a small profit and kept the 200 bonus shares as a memento of his first foray into the stock market.

That sentimental keepsake morphed into a tidy pile of shares in two firms – Rothmans Industries, which was taken private in 1999, and Rothmans Malaysia, which has since been renamed BAT (Malaysia).

My father’s original bonus shares multiplied into about 2,000 BAT (Malaysia) shares worth RM136,000 (S$51,000). Considering that the bonus shares were “free” in the first place, his investment had turned out remarkably well, and that did not include the dividends paid out over the years.

Of course, it would have been better if investors like Ms Groner and my father could have adopted a strategy of buying a basket of stocks to spread their investment risks but the examples they provide attest to the fact that, over a long period of time, stocks do outperform other forms of investments such as bonds, or just keeping the money in the bank.

In his 50th annual report last month to Berkshire Hathaway shareholders – a must-read for all investors – financial guru Warren Buffett noted that while stocks will always be far more volatile than cash-equivalent investments such as US government bonds, they are still a much safer bet over the long term.

But he also observed that one problem with investors is that they often mistakenly equate the wild price swings in the stock market with risk.

He said: “True, owning equities for a day, or a week, or a year is far riskier than leaving funds in cash equivalents… But for the vast majority of investors who can – and should – invest with a multi-decade horizon, such quotational declines are unimportant.”

One example would be the global financial crisis of six years ago, when pundits bemoaned the falling stock prices and advised investing in “safe” US Treasury bills.

“People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. The S&P 500 Index which was then below 700 is now about 2,100. If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund,” he added.

Mr Buffett also observed that what investors do not realise is that they make stock investments very risky by their behaviour. Instead of investing, they indulge in active trading, attempt to time market movements, pay high and unnecessary fees to managers and advisers, and use borrowed money to make huge stock bets.

His observations flashed through my mind, as I was asked by a participant at a recent investment seminar about what stocks he should buy.

My immediate response was that he should focus only on investments which he is comfortable and familiar with, and not on the counters that I am comfortable with.

Too often, when an investor puts his money in a stock, he does so in the hope of making a quick buck. He often gets a tip to buy the stock and he doesn’t know what he is buying into. That is not how one makes money in the stock market.