Investments: Be prepared to wait it out to reap benefits

3 March 2011
Lim Say Boon


Investors usually greet with scepticism bankers who come bearing messages of long-term investment.

"So you mean I won't make money in the short term?" And you know what? The only honest answer is this: You may or you may not.

Over short periods of time - periods less than a year for example - your probability of making a profit on equities is probably 50-50.

Yes, even for fundamentally sound investments. But the longer the time frame, the greater the probability of you making a profit. That is not just an article of faith. That is an observation based on historical data over many different periods of time.

Indeed, it is not the banker who comes bearing the message of the long-term you should greet with scepticism. It is the financial industry players who come bearing messages of doubling or tripling your money with this or that stock you should regard with a lot of scepticism.

You know the old saying - if it is too good to be true, it probably is not true. Does it pass the common sense test?

That is, if the guy coming to you with what the industry calls a "double bagger" (that is, a stock proposition which can double your outlay in a short time) is so confident of the outcome, why would he bother sharing it with you just to make a percentage of one per cent on commission? It is a bit like those e-mails from Nigeria promising huge profits if you transfer a sum of money into a dodgy bank account.

Few bankers will tell you this. So let me do it for you. Making money is difficult. And the sooner one accepts that, the easier one's wealth accumulation journey becomes.

Any business person - including the most successful - will testify to the difficulty of making a profit. Open market places throw competition at any money making proposition and in the process erode profit margins. Why should we expect making money from the stock market, for example, be any different? The stock market is after all a huge collection of different businesses and money making propositions.

Indeed, if I knew 30 years ago what I know now, I would be a lot wealthier today. I would not have been the only person in Singapore who has wasted lot of money trying to catch the elusive "double bagger"; wasted a lot of time waiting for the perfect moment to buy assets; wasted a lot of opportunities to make money from just buying good, buying cheap, and buying into the power of returns compounding over the years.

Assets, from properties to stocks, do appreciate over time. The logic is simple. As societies become more productive, as they become wealthier, the value of assets in that economy should appreciate.

Suppose you were a manufacturer. The technologies available to you in your business inevitably advance with time, so you can make more "stuff" in any given period with the same factory and the same workforce.

That is, your factory becomes more productive. In that way, your revenue should rise and your profits should grow. As a result, your company's net asset value rises and its share price grows with that. And the land on which your factory is located should be worth more as businesses (including yours) earn more profits from any given piece of real estate.

Of course, none of this would be true if the global economy goes into a long economic "winter" - an extended deep recession or depression.

But fortunately, over the past hundred years or so, periods of recession have generally been growing shorter while periods of economic expansion have been growing longer. There have been more growth years than recessionary years. That is the basic factor underlying the phenomenon of more positive annual returns on stock markets than negative years.

Mind you, there will always be economic and market cycles for all manner of assets - including equities, bonds, commodities and properties. But the value of assets does not fluctuate on a flat line. The march of productivity and prosperity suggests that asset values tend to fluctuate on rising trend lines. So there are cycles and there are trends.

The investor must be prepared to ride out the cycles to avail himself to the benefits of the long-term trend.

There is a line from an ancient Persian fable of Indian origins: "The nightingale which cannot bear the thorn, it is best it should never speak of the rose."


Lim Say Boon is the chief investment officer of DBS Bank.