What is Long Term Investing?

What does long term investing mean?

Warren Buffet said, “Always invest for the long term”

Exactly how long is long term? 5 years? 10 years? 20 years? Warren Buffet said, “Our favourite holding period is forever.”

Long term is not define as any time interval but a mind-set. It is about thinking what could possible happen until end of time, risk and reward and apply to NOW. Therefore, whatever market crisis happened you will still end up well, regardless of your investing horizon.

Long term investing is slow and boring. It is about finding great businesses and allow it to compound over long period. Trading in and out the market will not do any good, lot of study had shown that by missing the best few days, your return will be impacted.

Should i hold cash?

Another frequently asked question is “should I hold cash at X% so I can buy the dip”. There are also many studies done online. A study done by Vanguard, if you have $100k do you lump sum or DCA , if you lump sum (immediate) 70% of the time you do good and 30% of the time you will do good when you DCA. In addition, holding cash for too long you are guaranteed to lose money, 70% Vs 30% doing good, you decide. For me 100% invested, always.

Risk Management & Compounding

Warren Buffet said, “Rule No.1 Never lose money, Rule No. 2 Never forget rule No.1”

Many retail investors advocate that while you are young, one should take more risk for higher reward. However, this will have an adverse long term compounding effect on your portfolio. Assumed you invested $100 for 20 years, and if you loss 10% of your capital at year 10, the total return will reduced by 18% at the end of 20 years. In order to achieve the same return, the portfolio have to grow at a 12.2 % p.a. compounding rate for the next 10 Yr.

On contrary to what majority belief, most great investors are actually risk adverse, avoiding risks are the first priority. Investing in great businesses that have consistence performance that allows consistent compounding process.

Resource: https://www.dataroma.com/m/home.php

When we look at Youtube, there alot of 10X stocks video. However, there will be many stocks that will 10x next few years, but there is always another component of thing, RISK. Alot of these stocks will go 10x but when there are trouble, they may also go 10x in another direction.

When we look at Berkshire portfolio, we can also see Warren Buffet hold some of the baggers, excluding dividend. The only different is these are profitable companies and invested with margin of safety. Low risk, high reward.

The characterstic of a 10x stocks are it take time and require quality buisness compounding over time. Experience investors are looking for proven buisness model, at a fair price and ablility to scale. So they did not need to worry about the risk of whether the buisness will ever become profitable or go bust, no speculation.

Many companies will 10x because of stock price, but there is a different between growing by losing money VS sucessfully scaling a strong profitable buisness model. Alot of these growth stocks are in trouble now, the growth is there but the profitability remain questionable.

Portfolio Construction for long term

In order to understand how to allocate our money for the long term, it is crucial to understand what is the key drivers of returns and how it fits YOU.

For a company to survive for the next 100 years, a strong moat is a pre-requisite. Having a strong moat also enable to increase the price and pass the cost to consumer in any economy situation and do not need to go into price war to get buisness

A company can distribute earning by 3 way, that create value for investors, reinvest, dividends and shares buyback. Which to focus on, depends on your financial goal but of course, alway focus on great buisness.

• Reinvest (focus on return of capital)
• Dividends (focus on cashflow)
• Share buyback (focus on earning per share)

Historical performance, based on a study from Prof McQuarrie, "Stocks Market Charts You Never Saw" to emphasis on the impact of dividend on return. US stock market in the past is very different from today, where stocks only goes up.

During 1852 to 1932 the stocks market is actually going nowhere for 20 years and dividend accounted for almost all return. Can this happen again in our present time, stock going nowhere for 20 years? Maybe. Have your portfolio structure for such event? What will be your reaction if such event occured?

In this next chart, we can actually see the impact of inflation and dividend on the stock market. After removing the inflation, the return suddenly become unattractive. Thus we can safely say as long FED keep printing money, the stocks will continue to rise, for today situation. If you are into growth is good for you.

Conclusion: My core strategy for long term

• 100% invested all time
• Focusing on profitable, proven buisness model that have a moat and providing consistent buisness performance
• Low risk, high reward, no speculation
• Have a mixture of growth and dividend generating instruments. Which allows me to compound no matter in what market condition.