Long term investing does not guarantee success. Why investors such as Warren Buffett could make a lot of fortune with simple buy & hold strategy but some investors become poorer with investing over the long term?
“Buy stocks and hold for long term” is not sufficient.
Here are 3 right ways of Long Term Investing, depending on the expertise level:
1) Beginner Investors
“Buy good stocks and hold for long term.”
By adding a condition of “good” stocks, the long term investing strategy becomes 10X stronger because it has additional edge from FA (Fundamental Analysis) with strong business.
Even one does not know how to select good stocks, a no-brainer way of investing is to buy stock indices of growing economies, eg. S&P 500, Dow Jones Index, China A50, Hang Seng Index, or even Singapore STI. This provides sufficient diversification with strong country (Level 3 giant) as protection of investment.
Property in certain countries (big cities, limited land, growing populations), by default is a giant. Therefore even if one does not know how to choose property, majority of property investors could make money if having the holding power more than 1 decade.
Stock is different, careful selection of strong business is critical. Weak stocks could make us poorer with time, while giant stocks will grow stronger with holding for long term.
This group of investors need to master strategy to select giant stocks.
2) Intermediate Investors
“Buy good stocks at lousy price and hold for long term”
On top of the Strategy #1, if one could integrate the TA (Technical Analysis) weapon to buy low, only then hold for long term, this will help to maximize the capital gains.
One could integrate trading (eg. trend following) into investing, after buy low, there is no need to sell high. After the stocks have recovered from correction during market crisis, the capital gains will help to strengthen the confidence to hold for long term.
This group of investors need to master strategy to buy low for giant stocks.
3) Advanced Investors
“Buy good stocks at lousy price and hold for long term, aligning to own personality”
The risk of “Beginner and Intermediate Investors” is to overcome own’s fear during global financial crisis because they may have capital loss if enter the investment market at a wrong time. Warren Buffett’s Berkshire share price drops more than 50% in subprime crisis 2008-2009 but he could overcome the crisis because he has a portfolio of strong giant stocks. More importantly, this buy & hold strategy is aligned to his personality. For others who blindly copy and paste this strategy, it may not work because there is a mismatch with personality (risk tolerance level, emotional control, investment knowledge level, etc)
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In short, investing could be very simple (buy & then do nothing, holding for life), it could also very complicated if one does not have the right weapons of (Optimism = FA + TA + PA). Before we envy of those simple investment methods, we should check if it is suitable for us.
