Investing in the Stock Market? Thinking in Generational Terms Will Do Wonders For Your Portfolio

Because successful investing takes time, discipline and patience.

Warren Buffett is arguably one of the best investors in the world.

From 1965 to 2021, he generated annual returns of 20.1% for his company’s shareholders.

If you had invested just $1,000 in his firm, Berkshire Hathaway, in 1965, you would be sitting on a cool $28.5 million by 2017.

Buffett’s patience in the stock market is one of the key reasons for his incredible return.

He is well-known for holding his stocks for the long run. In fact, he once famously remarked that his favourite holding period in stocks is “forever”.

Yes, Buffett has sold shares often, but it is the thinking behind his quote that matters.

If you have a long time horizon when investing, you will focus on the things that matter (hint: stock prices are not one of them) and will not bother with the things that don’t.

The following is one of Buffett’s well-known quotes:

“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

It requires a considerable amount of time for any business to do well.

By focusing on the long term, we are forced to think about the quality and fundamentals of the company we are investing in.

If we have an “investing” time frame of just one month, we would only be looking at stock price fluctuations alone, and this will be to the detriment of our portfolio.

The daily fluctuation in stock prices will not do any good for our psychological health as well.

However, if our investing time frame is measured in decades or even generations, we will be forced to think about the things that matter: The long-term prospects of a business, the leaders behind a company, the value of a business, and so on.

As prudent investors, we want to invest in companies with products or services that will not become obsolete in the next few years – ideally, we want companies with businesses that can thrive.

Furthermore, when we invest with a long-term view, the probability of us suffering losses will be much lower, which can be seen from the following table:

As you can see, when you hold the S&P 500 index just for a day, it’s 50/50 when it comes to your chance of making money – that’s no better than a coin flip.

However, if your holding period is extended to two decades, the chances of losses go down to zero. Talk about long-term investing and its merits.

Even though the table above refers to the broader stock market, high-quality companies tend to do well over the long run as well.

So the next time you’re looking at a company to invest in, think in terms of years, decades, or generations, and not days, weeks, or months. It’s the mindset that makes a whole lot of difference.

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We Are More Powerful Than We Think We Are

2 episodes, 2 brief moments, 1 lesson.

“Daddy, that’s a policeman!” shouted my three-year-old son (V) to my wife and me, as we were waiting for our taxi to arrive at Terminal 2 of the Singapore Changi Airport.

“Shall we go and say Hi?” my wife asked V.

Without hesitation, V dragged his mother to the two armed policemen and waved “Hello!” at them.

The policemen reciprocated with a smile and a wave.

A ponytailed girl was playing with her brother at the playground as I was walking back home in my Navy No. 4 after ending my in-camp training (ICT) for the day.

“Are you a soldier?”, the young girl, who looked like she was around five years of age, blurted out innocently.

“Yes”, I said, proudly.

After a while, she waved me goodbye.

Two separate episodes. Two brief moments.

But both powerful.

As a father, I felt happy that the policeman made my son’s day, when he could have chosen to ignore.

As an uniformed personnel who wears my No. 4 only once a year during ICT, I felt elated to make the girl happy, when I could have just walked as if I didn’t hear anything.

Sometimes, we don’t need to do much to make a fellow human being happy — we just need to be present and reciprocate.

1 Key Investing Lesson From “Finding Nemo” Movie

Even movies can teach us about investing.

I just listened to The Motley Fool Money podcast entitled “David Gardner on Investing During Tough Markets”.

In it, Chris Hill discusses with David Gardner, co-founder of The Motley Fool, about maintaining a “net buyer mindset” during a downturn and more.

Source: The Motley Fool

Something that stood out for me during the discussion was how David Gardner connected the current market situation to a famous line from the Finding Nemo movie.

Here’s what Gardner shared in the podcast about staying the course and investing for the long term (emphases are mine):

“I would say first of all that I’m always investing, ABI always be investing. Chris, I think everybody should always be investing if you are not in retirement. If you’re not about to retire, you should be a net saver and you should just be adding that money to the market through thick and through thin. In this sense, let’s go back to Finding Nemo. …

Just keep swimming. I found myself using that as a hashtag on Twitter throughout a lot this year. I spoke to it on my podcast. It’s always true anyway. If you are earning a salary, you should be saving every two weeks and I think you should be adding it to the market in whatever way you prefer, whatever your orientation is [be it in funds or individual stocks], but just keep swimming …

I think the reason we need to say just keep swimming is not when the tide is coming in and/or the surfing feels good, I think that Dory starts saying just keep swimming because it’s a time of stress. It underscores the times when it’s hard, that’s when we need to hear that phrase, even though we should always be doing that all the time anyway.”

Read also: 9 Investing Lessons From “Breaking the Rules With David Gardner” Podcast

Here’s the clip from the Finding Nemo movie:

So even when the going gets tough in the stock market, just keep swimming…

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23 Investing and Life Lessons From The Joys of Compounding Author Gautam Baid’s Sharing

Nuggets of wisdom from The Joys of Compounding author’s sharing on MoneyWiseSmart YouTube channel

MoneyWiseSmart held an informative session with The Joys of Compounding author Gautam Baid on its YouTube channel early last year.

Here are some of my key takeaways from the awesome sharing by Gautam (screenshots below are from the deck shown during the talk).

1. Compound interest is the eighth wonder of the world. However, there’ll be this “valley of disappointment” one has to go through before we can see the magic of compounding happening.

2. Finding your North Star helps you to stick through the “valley of disappointment” and not give up.

3. You can find your calling by discovering your Ikigai.

4. The key to compounding is time and endurance. It’s not necessarily earning the highest returns.

5. But volatility may affect you from doing sound things in investing. However, the up-and-down movements in the stock market are normal, just like how day follows night and night follows day.

6. If you had invested in great businesses through the volatility, however, you would have done well across all business cycles. This is despite all the uncertainties in the market like rising interest rates, inflation, political tensions, etc. But bad businesses destroy wealth, even at low entry prices.

7. We shouldn’t be timing the market. Time in the market is what matters.

8. So what we should do is stay the course; focus is the key to success.

9. On why investing at a young age is powerful.

10. The +-x/^ formula to wealth.

11. How transaction costs, no matter how small they look, add up over time.

12. Always reinvest your dividends.

13. On bull and bear markets: Never let a bear market go to waste (reminded me of the recent March 2020 market crash).

14. On value traps: Everything trades at the level it does for a reason, so respect the market’s wisdom.

15. As investors, we need to adapt to changing times.

16. We should avoid psychological biases (by using a checklist and by keeping an investing journal).

17. Traditional accounting is not keeping up with the changing times. Always focus on unit economics for digital businesses and not on their accounting profits.

18. Investors who have a strong investing psyche have an edge and it is their competitive advantage. How you behave will matter far more than the fees you pay, asset allocation, or analyses.

19. Here’s how to sustain wealth after we have created it.

20. As you gain experience, you will develop a “feel” for the stock market over time (I totally agree with that).

21. Look beyond the short-term “suffering” when analysing companies that are investing for long-term growth.

22. Have humility and be a learning machine.

23. Have a constant learning mindset so you can be a lifelong learner.

If you would like to read the above in a Twitter thread, here’s the summary I wrote a year back on my Twitter account:

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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P doesn’t own shares in any companies mentioned.

Reflections From Howard Marks’ Memo on Selling Stocks

When should you sell your stocks?

Howard Marks is a well-known American investor and writer who writes insightful memos to the clients of his investment firm, Oaktree Capital Management.

On Friday (14 January), Marks released his latest memo entitled “Selling Out”.

The memo explores one of investing’s most fundamental questions of when we should sell our investments.

Marks’ latest memo resonated with me so much that I thought I should spend some time reflecting on it.

Here are some of my favourite parts from the memo, together with my own commentary.

Too Much Activity ≠ Outperformance

One of the biggest myths in the stock market is that you have to actively buy and sell to do well in the stock market.

In his memo, Marks says that when we find an investment with the potential to compound over a long time frame, one of the hardest things is to be patient and maintain your position for as long as necessary.

Investors can easily be distracted to sell due to news and emotions such as fear and greed.

This reminds me of a research paper that was published in 2005 titled “Action bias among elite soccer goalkeepers: The case of penalty kicks”.

In the study, researchers performed an analysis of 286 penalty kicks in top leagues and championships worldwide.

They found out that penalty takers shoot the ball to the right of the goal 1/3 of the time, to the left 1/3 of the time, and to the centre 1/3 of the time.

The paper also revealed that a goalkeeper picks a side and dives 93.7% of the time and stands in the middle merely 6.3% of the time.

There was a clear bias towards action.

With 30% of the kicks right down the middle, the optimal strategy is to obviously stay in the middle.

However, by staying rooted without doing anything, the goalkeeper might feel he is portrayed as being incompetent, thus the need to dive.

The propensity to act even though the action may result in something less desired is termed “action bias”.

Similarly, the higher the activity in an investment portfolio, the higher the chance for our investments to do poorly.

So, the next best course of action (or inaction, in this case) is to just “sit on your ass”, in Charlie Munger’s words.

In his book, “Poor Charlie’s Almanack”, Warren Buffett’s partner Charlie Munger said (emphasis is mine):

“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.”

Like the goalkeepers, you don’t need to “dive” just for the sake of diving. Sometimes, not doing anything is “doing something”.

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Selling Because Price is Up (or Down)

Most investors sell after a company’s share price runs up as they are afraid that the profits will vanish.

However, there comes a reinvestment risk when the released capital has to be deployed into another company (not considering the time taken to research into a new company again).

What if, decades later, the company that you sold would go on to produce a better return than the new one that you decided to recycle capital into?

So the best course of action would be to just hold on to the winners. You should never interrupt the power of compounding without any concrete reasons (more on that later).

In a podcast at the end of 2018, David Gardner, one of the co-founders of The Motley Fool, shared his takeaways from 200 months of stock picking for an investment newsletter service in the US.

One of his learning was you lose far more on a potential winner than you can on a loser. He said in the podcast (emphases are mine):

“But the real biggest loser for you, if you’re an investor and if you’ve been acting over the long term, I bet you realize that it’s not the bad-performing stocks. It’s the megawinners that you sold too early. It’s that you didn’t stick with big winners…

If you ever have had a wonderful winner in your portfolio and you sold it too early, that is by far a more criminal act on your portfolio. You’re doing far more abusive damage to your own financial future than if you pick a really bad stock and watch it lose most of its value.”

On the other hand, you shouldn’t sell stocks just because they have fallen.

Yes, it’s painful to see losses in our portfolio, but that’s just part and parcel of investing.

If the companies you have bought are of high quality in the first place, and there are no fundamental changes to the business, then any fall in the stock price provides an opportunity to own more of the company at a cheaper price.

Therefore, it’s plain foolish to sell just because prices are up or down. Most of the time, staying invested is ultimately “the most important thing”, in Marks’ words.

So, When Should You Sell?

Selling a stock should never be based on emotions; there must be concrete reasons for selling.

The reasons should be “based on the outlook for the investment – not the psyche of the investor – and they have to be identified through hardheaded financial analysis, rigour and discipline”, says Marks.

In Marks’ view, selling should be done only if:

1. “If your investment thesis seems less valid than it did previously and/or the probability that it will prove accurate has declined, selling some or all of the holding is probably appropriate.”

2. “Likewise, if another investment comes along that appears to have more promise – to offer a superior risk-adjusted prospective return – it’s reasonable to reduce or eliminate existing holdings to make room for it.”

But you shouldn’t look at selling in a vacuum. It should be evaluated in terms of “opportunity cost”.

Some questions to ask would be:

  • What will you do with the proceeds? Do you have something in mind that could produce higher returns?
  • What will you give up if you continue to hold the stock instead of making the change?

If you are looking to leave your proceeds in cash (not planning to reinvest), a key question to ask would be: Why would holding cash be superior to holding on to the stock that you just sold?

Marks goes on to explore the topic of selling your stock when there’s a temporary share price dip and buying it back later when the price recovers.

He says it’s not generally a good idea to sell for purposes of market timing, which I agree wholeheartedly.

Many studies have also shown that market timing doesn’t work.

For example, a study by Index Fund Advisors showed that for a 20-year period from 1994 to 2013, the S&P 500 index averaged an annual return of 9.2%.

A $10,000 initial investment would give around $58,000 at the end of 2013.

However, if an investor had missed out on just the 10 best days of the 20 years, the average return would have fallen to 5.5%, meaning the final investment amount would only be halved at about $29,000.

The pioneer of index funds, John Bogle, once mentioned:

“Sure, it’d be great to get out of stocks at the high and jump back in at the low… [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I’ve never met anybody who had met anybody who knew how to do it.”

Therefore, it doesn’t pay to time the market; time in the market is more important.

The Cardinal Sin in Investing

Marks ends the memo by commenting:

“Usually, every market high is followed by a higher one and, after all, only the long-term return matters. Reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.”

Enough said.

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