Long Term Investing
Over the last 100 years, statistics show that equity investors have averaged gains of 7% per annum. That is if they bought and held their investments over that time. No other form of investment comes close to matching these returns.
Unfortunately, most investors fall short, there are two main reasons for this:-
1.they do not have the right mix of assets for optimum returns (to bake a cake you need the right mix of ingredients – too much flour and the cake could fall flat – the same holds true of investments – you need the right blend of asset classes).
2. they invest blindly without using any point of reference (a bit like going on a long expedition without a compass or GPS device).
Today I want to emphasise how important it is to use a point of reference when investing, the point of reference that is often ignored is the CAPE ratio, using the Cape you can determine the right entry point of a particular regional investment market (in other words when to buy into that market).
It seems common sense, to buy when the price is right, yet many investors behave irrationally.
To make some sense of what I am saying, consider the US stock market currently priced at 27.25 times its earnings, yet the long-term average is around 16.65 times. Does that ring alarm bells or what? The market has the potential to fall by 40% – just to meet its average Price-Earnings ratio!
Despite this anomaly, the US stock market could go even higher, driven on by emotion and rhetoric and the media, not forgetting, the collective irrationality of investors.
There are several considerations that can assist investors: –
The first is the cyclically adjusted stock market PE ratios, CAPE, this compares stock markets averaged price earnings ratios around the world, and informs you the where the best value is for a regional stock market.
The second is developing an understanding of the political and currency risks of investing in that region.
The third is to remember to diversify your holdings.
The fourth is to understand that this is not the way to make money short term, one must be patient.
This is a contrarian strategy – you are buying Low and holding for long term and hopefully selling high.
Does this appeal to you?
Short Term “Investing”
I hesitate somewhat to class this as an investment strategy, but for sensible long-term investors who are playing a patient and sensible game with their investment portfolios, ad who might want a bit of fun, if so, then they could consider for say 10% of their investment portfolio – riding investment market trends.
That means that whatever the Cape ratio is of any market, that they join in the collective market madness, and follow the trends of any stock market. The adherents of this strategy will necessarily only invest when both the short term and long term trend of the market is up.
Quite clearly this has risks and you necessarily require investment software to assist you.
The UK Stock market is currently in an Up-Up position.
The above strategies go against traditional investment advice, that is because they are contrarian.
They both make a nonsense of the normal arguments between passive and active investing, which is a trap most advisers fall into.
Please be aware that whatever you decide to do as an investor. The normal safeguards of diversifying the mix of your assets should still be followed (often referred to as asset allocation).
Choosing Collective Investment FUNDS (a contrarian approach).
Most investors sensibly stick to collective investments for the bulk of their investment portfolios.
Often funds are chosen because of previous good past performance, it is often stated that past performance cannot necessarily be repeated in the future. That’s a sensible statement.
What is often not stated is that persistent “poor past performance” often does repeat in the future.
So how do we utilise the contrarian investing style with collectives?
Many investors follow the performance of funds, we prefer to follow the manager so when a top performing fund manager moves to a new investment house, we move with the manager and ditch the previous fund. That has proved a successful strategy for us and our clients over the years.
Look for a catalyst, if there is a reason why a fund has performed badly (although it may previously have had good performance) then this could be because its sector is out of favour, if the factors affecting the sector have changed, then this may be a chance to buy while prices are cheap.
You know what’s coming next, my favourite topic, investment trusts. Investment Trusts are often a contrarian play, if the sector has fallen out of favour then a large discount may arise because let’s face it not everyone is patient. Investment Trusts are fertile hunting ground for the contrarian investor, once the sector returns to favour and markets stat to pick up then the patient contrarian investor may benefit from a “double whammy” on the price of the investment trust as the discount may unwind and valuations may improve.
Whatever Investment style you choose
Please remember you do not have to invest as soon as you have monies available to so, time your investment purchases well. Choose a strategy that suits you. Avoid using structured products. Learn how to invest intelligently – play the long game.