How to gain a sustainable edge in investing

MANY investors dream of discovering the Holy Grail to successful investing. They hope to discover a foolproof method that tells them which stocks to buy and which ones to avoid. Or find a way to guarantee profitable results.

But in today’s world, where information travels fast and far, any method that works well will soon be copied by others.

In the past, access to corporate information was a valuable edge for investors. But now, with the Internet, anyone can get the same information easily. How can you gain a lasting edge over other investors? The answer may surprise you.

By investing for the long term, you can benefit from the power of compounding and avoid the noise of short-term fluctuations. Most investors lack the patience and discipline to hold on to their stocks for years.

But if you can do that, you will have a rare and powerful edge.

Buy and hold is dead

Many investors are too quick to sell their stocks. A Reuters analysis of New York Stock Exchange data showed that the average duration people held their shares was only 5.5 months. This is a big change from the past. In the 1950s, investors kept their shares for eight years on average.

It begs the question – what makes investors so impatient today? Technology and zero trading costs are partly to blame. With smartphones and the Internet, buying and selling stocks is as easy as tapping a button. Many brokerages offer free trades, so investors do not have to worry about paying commissions.

To make things worse, analysts from these brokerages often give one-year price targets for stocks. This encourages investors to focus on the short term and trade more often. While it sounds easy to follow, trading is not a good way to invest.

Businesses need time to grow

When you buy a stock, you are not just buying a piece of paper or a number on a screen. You are buying a share of a real business that sells products and services. In essence, you want to buy stocks that can grow their businesses over time. As an investor, you want to hold on to them for as long as possible.

Warren Buffett, one of the world’s greatest investors, once said: “If the business does well, the stock eventually follows.” That means you need to give time for the business to do well. When it does, you will be rewarded with a higher stock price.

Here are two examples of stocks that have done well over time. One is Sheng Siong, a well-known supermarket chain in Singapore. Sheng Siong started with 33 stores in 2013 and now has 69 stores. That is more than double the number of stores in 10 years.

But that is not all. Sheng Siong also grew its sales and profits. The company’s sales went up from around S$637 million in 2012 to S$1.3 billion in 2022. Meanwhile, profits went up from less than S$42 million in 2012 to over S$133 million in 2022. That is more than double the sales and more than triple the profits in 10 years.

Sheng Siong’s stock price went from S$0.53 in 2012 to S$1.65 in 2022, an appreciation of more than three times in 10 years.

Another example is Haw Par Corporation, which makes Tiger Balm, a famous pain relief product. Haw Par’s healthcare business, which houses Tiger Balm, grew its sales and profits, too. Segment sales rose from S$92 million in 2012 to over S$164 million in 2022.

At the same time, the business unit’s profits increased from around S$17 million in 2012 to more than S$40 million in 2022. That is almost double the sales and more than double the profits in 10 years.

As for its dividend and stock price, you guessed it: Haw Paw’s dividend climbed from S$0.20 per share in 2012 to S$0.30 per share in 2022. Meanwhile, the stock price rose from S$6.11 in 2012 to S$9.58 in 2022. That makes for a 50 per cent increase in dividend and 57 per cent rise in stock price in 10 years.

These two examples show you how investing for the long term can help you make money from stocks. You need to buy good businesses and hold on to them. Do not be tempted to sell them too soon. Give them time to grow and reward you.

Extending your time horizon

To be sure, not all stocks are good to hold for the long term. You need to look for stocks that have these qualities:

• A strong competitive advantage that allows it to outshine its rivals
• A good management team to run the business well and grow it further
• A favourable outlook that can support its growth for many years to come

Stocks with these qualities can compound your wealth over time. As their profits grow, they can also pay you higher dividends.

But you need to be patient and disciplined to hold them. Stock prices can go up and down in the short term for many reasons. Do not let these near-term fluctuations scare you. Stick to your long-term plan and focus on business performance.

A simple rule of thumb applies. If the business is still growing its sales and profits, you should keep holding its stock. By investing for the long term, you can gain an edge over other investors who are too impatient or too busy to do so. Many such investors are hedge funds or unit trusts that have to report their results every month or quarter. They have to buy and sell stocks often to please their clients and justify their fees.

But you do not have to do that. You can just sit back and watch your stocks grow. All you need is courage and emotional control to stay the course, and make sure the business is still doing well.

Get smart: Holding out for a long holiday every year

A friend of mine once asked me to sell my entire holdings in a profitable stock so that I could use the money to enjoy a nice holiday. I countered by saying that if the stock did well and increased its dividend over the years, I would receive enough dividends to be able to take a long holiday every year.

Rather than selling the stock and pocketing the profits, I chose to hold on to it as I believed the rewards would be well worth the wait. Does that sound too good to be true? This is possible if you follow one simple rule – stay the course.

When you invest in a high-quality company, you should not sell it even when the market is down or the business faces challenges. You should trust that the company will overcome the difficulties and emerge stronger. This is the advantage you have as a long-term investor.

You need to resist the temptation to sell your stock early or to chase the next hot idea. If you do so, you will miss out on the potential rewards of your investment.

So, the next time someone tells you to sell your stock and go on a holiday, think twice. You might be better off holding it for the long haul. I promise that if you do so, you will find that the eventual rewards are well worth your effort.

The writer does not own shares in any of the companies mentioned. He is portfolio manager of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage.