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Referring to the screenshot below, over the long term (22 Years), the KLSE - ETF has generated a return of 55%. (Even when you have invested during a period of exuberance when stocks in general are over-valued.)
This may be due to several reasons:
1) As the population grows, the economy grows too, leading to increase corporate profits.
2) As productivity increase, more value can be created by using less resources thus generating extra income in a shorter time.
Both of the above reason trend seems to be here to stay. Therefore, can we say that the ETF will likely to replicate the same performance?
If Investing for the long term in the ETF is almost a sure way to make money in the stock market, why do most people lose money?
(Source : http://finance.yahoo.com/echarts?s=%5EKLSE+Interactive#%7B%22range%22%3A%22max%22%2C%22scale%22%3A%22linear%22%7D)
Warren Buffett once said "Stocks are a wonderful thing to own over the long term, you only need to avoid:"
1)Buying The Wrong Stocks
If I have shown you the graph above, you probably wouldn't be too interested in investing.
After conducting classes for hundreds of students, I noticed that the reason why most people lose money is that they try to get rich quick by beating the market. (Hence, they won't buy the ETF)
In the process of trying to do so, these investors constantly look for the next big thing. What happens is they began to be involved in speculative stocks, futures & options.
(I am not saying that futures & options are bad things, it is a very good hedging tool under the hands of the Pros but I think it will be very dangerous for the amateurs to try them)
Of course, as investors in common stocks, our goal must be to beat the market as a whole. However, good investors know that they should do this by sticking to their principles. Value investors will stick to their mantra to "Price is what you pay, Value is what you get" whereas Trader would stick to their mantra of "The Market Is Always Right, Never Go Against The Trend"/
Whatever it is, those that are profitable does it systematically.
Lesson: Get educated & disciplined before picking your own stocks.
2)Buying at the wrong time
Most people who lose money try to time the market. Unfortunately, most have a wrong concept, the buy on rumors and sell on panic. Of course, once in a while there will be some quick bonanzas but that is just the market fooling you. Most people do not have an entry & exit strategy. That's why they tend to buy when it is expensive and doesn't know when to sell.
Is timing important in stocks? Yes, it is very important. If done correctly.
Referring to the graph above, you would see that if you have bought at 1997 when the index was 300 against 1993 when it was 1275, you will see the great difference between them.
If you have bought at the lowest (unlikely), you would have made a 500% gain versus when you have bought at 1993 with a gain of 50% (In fact, you lose money in real return after accounting for inflation).
So, stop telling yourself timing is not important. But here's what you need to know:
No one can time the market perfectly but there are methods to guide your buy & sell.
If you are a value investor:
Buy only when you have a good safety of margin.
If it is a very attractive business, buy when it is at least 20% undervalued. Say, you calculate that the intrinsic value is RM2.00, then buy when it is RM1.60 or below.
This way, you would have prevented yourself from buying at the time when stocks are expensive and only allowed yourself to buy when stocks are cheap.
If you are a trader:
Only buy when the signal says so. However, I think what is more important is the trading strategy & discipline.
You must set a target price & a cut loss threshold. That way, you could avoid huge losses & when the downside is taken care of, the upside will take care of itself.
Lesson: Know Your Style & Follow The Strategy
Investing for the Long Term:
Dear reader, long term means at least 3 years. Do not get frustrated when your stocks doesn't perform in the short term. It is extremely difficult to invest in the short term in the increasingly volatile market. When you buy a stocks, you are getting a business, if done right, your chance of incurring permanent loss is minimal. However, even if you have bought the best business in the world at a bargain price, there is absolutely no guarantee that you will make money in the next month, or quarter, or even year. But if you have the holding power & the right emotional strength, you will profit.
I can tell you, it is easy to learn about the fundamental analysis & the technical stuffs, but the right psychology, it needs to be developed & that is where most people fail.
Note: If you want to profit while being able to sleep at night, you must only invest with the money you do not need. Only invest if there is no short term foreseeable need for a lot of cash.
You can get the best investing education in the world but if you are not ready to see your portfolio stagnant or going down in the short term, then maybe investing for the long term is not for you.