Oh, what an irresponsible title for an article!
Especially after the S&P 500 has succumbed to its worst start in decades for the first half of the year. Stocks can lose you money and I should know better, cynics will croon.
The truth is there are a great many misconceptions about investing in stocks and what stocks represent.
Big money, fast money
Let’s start with the obvious.
For some, investing is filled with visions of the enormous amounts of money made.
The allure is not just in the amount made — but in how it is made.
Terms such as “strike it rich” or “a sudden windfall” are often associated with investing where great wealth is suddenly bestowed on a lucky few.
This fervour for instant riches is further fuelled by stories of overnight wealth gained during bull markets. In fact, there are even movies made about how big gambles paid off handsomely for a select group of savvy investors.
Big short, big money
Take The Big Short, a movie that raised the profile of hedge fund manager Michael Burry.
Based on a book by Michael Lewis, the show had all the right ingredients to spur the imagination of the public.
There was Burry, depicted as a genius at crunching numbers.
There was a US housing bubble forming in 2005 but was largely ignored by all but a few traders and hedge fund managers.
Subsequently, there was a high-stakes bet by Burry on the bubble bursting.
Of course, by now, we all know what happened next.
The stock market did suffer one of its worst declines ever between 2007 and 2009 as the US economy fell under the weight of the housing crash.
But for Burry’s fund, which bet against the market, it made out like a bandit.
Between November 2000 and June 2008, Burry’s Scion Capital produced a near-six fold return, net of fees and expenses.
So there you have it.
A big bet is made and as a result, big money is made.
That is what you need to win big in investing, right?
Not so fast.
Coming up short
The popularity of the movie earned Burry the nickname, The Big Short, a label that has stuck with him until today.
But here’s the kicker.
You’ll be wrong to assume that shorting is how he makes most of his money.
In an interview with Bloomberg after the movie’s release, Burry said it was ironic that he is best known for shorting the stock market.
To correct the misconception, he made it clear that he does not spend his time looking for opportunities to short the market.
Instead, most of his time is spent looking for “good longs”, or stocks that can be held for the long term.
Now that’s something they won’t make a movie about.
May the odds be with you
Eugene Ng, the founder of Vision Capital, shared some telling historical statistics on the S&P 500 on why you should invest for the long term.
Simply said, the longer your time horizon, the higher your odds of a positive return.
So, here’s the deal.
If you are trading in and out of the S&P 500 within a single day, your probability of netting a gain is not much better than a coin flip.
Lengthen your holding period to a year, and your chances of a positive result will be around seven out of every 10 one-year periods.
Stretch that out to 10 years, and history shows that you made money almost 90% of the time.
To cap it off, buy and hold the S&P 500 for 20 years and more, you will be 100% positive and not lose any money.
Said another way, the path to positive returns depends on how long you are willing to hold.
Stocks for the long run
What about bonds?
Wouldn’t that be a safer option compared to stocks? That is generally true.
However, holding bonds also comes with lower returns.
In the long run, historical data show that stocks are the better choice compared to bonds.
According to an analysis from Wisdom Tree’s Jeremy Schwartz, stocks outperform bonds 60% of the time for one-year periods between 1802 and 2021.
Extend the time frame to a decade, and the odds of stock returns outpacing bonds increases to three out of every four 10-year periods.
Finally, if you lengthen your time horizon to a 30-year period, the number of times stock returns outrun bonds raises to almost 92%.
Once again, the odds heavily favour a positive result — only if you are willing to hold long enough.
Be a lifelong learner
But surely, you can lose money in stocks too, cynics will argue.
They’re not wrong.
After all, there is no investment out there that will hand you a 100% guaranteed positive result all the time.
Nor should you trust anyone who promises you that.
Yet, stocks are not Toto tickets that you buy and discard when you don’t win.
If you do it right, you’ll be spending time studying the business behind the ticker, and learning about the industry that it operates in.
Any investor worth their salt will also pick up useful skills such as reading financial statements and immersing themselves in the ins and outs of investor psychology.
These are skills that can be applied to become a better employee or better business owner.
For instance, employees who are well-versed in the financials of their company will have a better context of the business beyond their own role, and better understand how to contribute to the well-being of the business.
Likewise, business owners may pick up ideas from other companies in their industry or learn from best practices from other industries.
So, all is not lost even if a stock investment does not work out.
Best of all, these lessons that you pick up, by being an investor, will last you a lifetime and can be applied going forward.
Now, that doesn’t sound like a bad deal, does it?
As Nelson Mandela once said, I never lose, I either win or I learn.
The same cannot be said about Toto tickets or short-term trading.
But I am convinced that Mandela’s words ring true, in particular, to the investors who hold for the long term.
And that is what you should be doing for your stock investments as well.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong does not own any of the shares mentioned.