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Jeremy Blatch
Tuesday, 30 July 2024, 11:57
“Sell in May and go away.” This old stock market adage has saved many an overzealous trader from financial ruin. But is it relevant for the investor who is prepared to have capital tied up in the stock market for a minimum of seven ... to ten years?
The investment classic, Stocks for the Long Run by Professor Jeremy Seigal, now in its eighth edition, provides the only reliable data regarding the growth of the US stock market over the last 200 years. Charts show that, despite civil war, two world wars, financial collapse, pandemics and natural disasters, businesses deliver far greater returns than cash or bonds. Shareholders receive these returns through increased earnings growth and dividends, producing a return of between 6.6 and 7 per cent per year.
It is the power of annually compounding returns that Albert Einstein described as the wonder of the world. Yes, it provides investors with an increase in capital over time. But essential to that process is the element of time. Anything less than a commitment to this reality is speculation. The investor with a short investment time horizon is dependent on anticipating movement in market prices, a skill or even luck which is impossible to exercise with any degree of certainty.
In the mentality of the short-term investor, he is the renter of a stock as opposed to the owner of a business. As JP Morgan replied when asked what he thought of the stock market, “It fluctuates.” A short-term investor has the almost impossible task of predicting market prices as to when to buy and sell. An investor with a long-term investment time horizon needs to have the mental fortitude to stay the course when pundits and so-called experts are forecasting gloom and doom.
To be an investor with a long investment time horizon you must have sufficient liquidity and cash flow, whether to cover the needs of your business or to maintain your domestic lifestyle with a margin of safety. You must also have the financial and psychological strength not to look at the share price daily, which would be an absurd practice if you owned a farm. A successful investor must be prepared for a stock price to decline by 50 per cent or more and be comfortable with it, or at least not panic. If you cannot meet either of these criteria, you should own shares in a business in the stock market.
For most of us, the most cost effective and sensible way to own stocks is through a very low-cost broad index fund, not engaging in stock selection or trying to decide when to buy and sell. Rather, have a well-thought-out investment strategy, with a target asset allocation to provide risk adjusted returns over time, and stick to it!
Impulse is the enemy of achieving successful investment outcomes. Sharp price declines are a buying opportunity for the long-term investors who know what they own and own what they know.
The author (jb@ehh.gi) is a member of the Society of Trustees and Estate Practitioners and an investment counsellor. The comments and observations by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities, nor does he receive any remuneration of any kind from names referred to.
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