I wrote this article during 2012 and it was published on Shareinvestor Magazine (Malaysia). I figured that I should store it some where before it gets buried under the archive of materials that I have accumulated over the years.
~ Xeo
Recently, I picked up a personal finance book written
by a local author from the local bookstore. I haven’t read a personal finance
book for the past 5 years, and I am pretty curious about what kind of advice
some of the local financial gurus are dishing out to the public. Needless to
say, the advice are pretty much the same as compared to 5 years ago: Buy and
hold for the long term, diversify. The only new idea that came out of the book,
thanks to the effects of the great financial crisis, goes like this: Financial
consultants and bankers are crooks! Do not trust them! Only trust the advice of
those who are not working in a bank or insurance company.
The world of financial information is a messy place,
with everybody trying to convince you that they are correct. Your friends, your
relatives, your colleagues, financial advisers, the media, financial
institutions and financial gurus are more than willing to volunteer their
“expertise” and dish out their version of wisdom, without verifying their own
facts first. It is no wonder that there are people approaching me telling me
that the more that they learn about investing, the more confusing they get.
The problem with people is that, they do not bother to
check the facts, before accepting some investment idea as the conventional
truth, and the only path to big, handsome investment profits.
"Stocks over the long run, will always go up, so just buy and hold"
At this point of time, I will roll my eyes and just
shake my head. It is so true, yet so misleading. This is true because, the
world’s biggest and most established stock index, US Dow Jones industrial
index, has been going up for the past 100 years and has averaged 8-9% return
every year.
However, consider this again with a fact I am about to
share with you. Imagine that you are the citizen of one of the richest nation
in the world. At the age of 25, you started your retirement planning and
faithfully invested your money in the local stock market, hoping, at the point
of retirement, you will have doubled or tripled your money with a nice nest egg
for retirement. 25 years later, at age of 50, while you are reaching your
retirement, you took a look at your investment portfolio, and was shocked to
see that your investment portfolio hasn’t grown at all. In fact, it is losing
money. The country in question is none other than Japan, one of the richest and
most prosperous country in the world. The problem with the conventional truth
of buying and holding for long term, only works, if you are investing in the
American stock market. So, it also means that, in order to emulate the
performance of the US stock market, that country should be demographically,
geographically, culturally and economically similar to that of the United
States of America. How can that be possible in the first place!
The other problem I have with the statement is the
definition of long term. I am not sure if it is left intentionally vague, for
the purpose of marketing and trying to convince investors to keep their hard
earn money in the market. In my opinion, 25 years is a pretty long term to me,
and if you cannot make money after 25 years in the stock market, than the
conventional wisdom of buying and holding for long term definitely cannot be
the universal truth.
On the other
hand, this statement has certain strong arguments backing it up. The stock
market is a reflection of the productivity of the nation. The price of a
company goes up, when it makes more profits, by reducing the amount of
resources it uses to produce a single unit of goods. Productivity has gone up,
profits have gone up and so does the stock price. The most important
determinant of productivity is technological advancement. As long as humans can
come up with ideas to do more with less resources, the advance of technological
improvement can never be halted. History has proven that humans could become
the dominant species on planet earth, is due to their creativity and innovation
and should continue to have technological breakthroughs into the foreseeable
future. Therefore, it is also true that in the long term, should technology
improves, the stock market should tend to rise as companies become more
productive in the future and buying and holding for the long term should work
too!
By now, you should be utterly confused. So, should I
believe that buying and holding for the term actually works, or should I throw
out this idea and look for a new investment strategy?? That is probably the
most important hurdle every good and successful investor goes through at one
point of time, and this will probably determine if you can retire rich, or be
permanently disillusioned with investments and deposit your hard earn money
into safe, but non-inflation proof fixed deposits.
The point I wish to bring across with this article is
to help investors understand, that the investment theories generally works,
only if the investor truly understand the context and content of how the
investment theories are being formulated, and apply these theories carefully
and selectively. There is generally no one magic formula that will always work.
And the only way to understand the context and content of these investment
theories and ideas are to study the history which these strategies derived
from.
Which is why, after many years of being a good history
student, I have developed a financial game called: Capital Gains. The idea is
to help investors learn more about the history of the financial world, spanning
across different asset classes: Stocks, bonds, properties, gold and even oil.
It is also a more interesting way to go about learning about history, than
trying to go through stacks and stacks of financial history textbooks and
hopefully, jump start people who are genuinely interested to become a
successful investor to move on to the next stage of their investment learning.
So, the next time, when somebody is trying to convince
you that their investment strategies are the only way to go, check with the
history books before putting your hard earned money into that investment. Or
else, you may end up as a sad, elderly Japanese investor, who is unable to
retire, because he put in a bit too much faith, in a conventional wisdom.
Lye Wen Song Xeo,
BBA, CFP®
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