All Good Things Come To Those That Wait: What you need to know about long term investing in the SET.

There is an old saying that “time waits for no one” which can be readily applied when it comes to investing in the stock market. When to get in, when to get out, when to hold and when to fold. However, there is another old Thai saying that “all good things come to those that wait”, which I personally find to be much more true when it comes to investing in the stock market. Marketing timing is easier said than done and quite frankly I have not met anyone who succeeded in beating the index over the long run by using market-timing strategy. The only exception may be Warren Buffett, one of the world's most successful investor, but then again he is a value investor, who invests for the long term. In this column I will share with you what you need to know about long term investment in the stock market and hopefully shed some light on the secrets of becoming a successful investor.

When it comes to investing in the stock market, there are three things that you must try to understand. First of all, when you buy a stock, you are buying into the future not the past. You are buying future cash flow, future prosperity and hopefully future profit and dividend yield of the company. Think long term like an “owner of a business” would. After all, having spent a lot of time in analyzing the company that you would like to own, why keep it for only one day or one month? Assuming that you have done your homework properly in identifying a stock or a portfolio of stocks that you like, there is no reason why you should give up ownership so easily. “Owning” a stock is like owning a car or a house. No one in their right mind changes their cars or homes everything day or every month. Most people keep their cars for at least 3-5 years and some may never leave the house that they were born in. Stocks are no different. In fact, stocks give you back much more in return than a car or a house ever could; for a start the price of a new car only depreciate not appreciate. Cars or homes do not give back dividend but (profitable) stocks do. Cars and homes require regular maintenance while stocks do not. And the real beauty is that when you own a stock, it is like owning a business but you don't have to go to work everyday, there are managers working on your behalf (for a salary of course!).

Using Siam Cement (SCC) as an example, had you put your money down for 100 shares of SCC when it was first listed 30 years ago, it would have cost you Baht 16,000, which may seem quite a lot of money at the time. But after 30 years of countless economic cycles, both good times and bad, your investment would be worth around Baht 2 million today plus Baht 300,000 worth of dividend payment. In addition, you would have a first class manager like Khun Chumpol Na Lumliang, the current CEO, working for you, full time! Where else can you find such a sweet deal?

Now compare that to a car or a house. A 30 years old car would be worth, today, nothing more than the price of scrap metal and I don't think the price of a 30 years old house could increase by 120 times like the stock price of SCC. One could argue that we all need a house to live in and a car to go to work and go about our daily lives but the point I am trying to get across is that when one buys a stock, do it for a reason and think long term . In this way you can't go wrong as I shall point out later on that those people who invest for the long term in the Stock Exchange of Thailand (SET) have never lost a single baht from their investment.

Secondly, when buying a stock, it is like planting a tree. As we all know that trees do need at least 3-4 years may be more before they bear any fruits. Stocks are also the same. Although, you may not need to wait 3-4 years before you get your first dividend cheque but it is important to manage your expectation about the likely rate of return you are getting from the stock market. Just like planting a tree, there are seasons to take into consideration. Summer, rain, winter etc. all have different effects on the well being of the tree. After the rainy seasons, certain types of trees will bear fruits. Not enough rain, then the fruits may not be so plentiful. Investing in the stock market is the same; there will be good times and bad, just like the seasons. If you look at

Table 1 below during the past 30 years from 1976 to 2003, in a really good year like in 1989, the SET Index went up by 127% in one year!; while in 1997 during the height of the economic melt down, the SET Index lost over 55% when it plunged from 831 points to 372 points. During the past 30 years, we have seen 12 bad years when the SET Index was in the red and 28 good years when the Index gave positive return. In other words you have a 42% chance of losing money (12:28).

However, if you take a longer term view of say 5 years at a time instead of investing in the market on a year by year basis, then your chances of loosing money declines significantly from 42% to 37%

(Table 2). As you can see for yourself, the best performing period was from 1985 to 1989 when the SET Index went up by 518% from 142 points to 879 points and the worst period was during 1996 to 2000 when the index lost 78% of its value. But what is interesting is the fact that by investing for a longer period of 5 years at a time the probability of losing money is now only 9 periods out of 24 or 37%. Admittedly, 78% loss in a period of 5 years is pretty scary for anyone, even for professional fund managers when the Index plunged from 1,280 points to 269 points, but that was really the blackest hour of our capital market history and that kind of a total collapse does not happen very often. Even in a worse case scenario, when all hope is lost had you kept to your long term goal of say 10 years, your chance of losing money will become even less

(Table 3 ). The best period was between 1984 to 1993 when the Index return was 1,151%! (yes that's right) from 134 points to 1,682 points. Moreover, only 6 periods out of 19 were in the red, and that was during the late 1990s when the economic melt down was at its worst. But what is truly amazing is when you stretch your investment horizon to 15 and 20 years respectively

(Tables 4&5 ) the probability of losing money is 0%. Many of you may find this hard to believe but numbers do not lie.

Another way of looking at the stock market return is in

Table 6 . If you cast your mind back to the 70s when long hair, flare trousers and high heels shoes were the height of fashion, the SET Index started life in 1975 at 100 points and it finished off at 149 points in 1979, a 49.4% return in 4 years. Then came the roaring 80s, when everything was in full swing, Thailand being one of the Asian “Tigers” with the whole world at its feet. The SET Index went up by 488.48% (149 points to 879 points) from 1980-1989. This was truly the best of times for many people. Then came the 90s when we paid a big price for our excesses during the 80s. But even then the Index only went down by 45% from 879 points to 481 points between 1990 through 1999. A small price to pay considering the severity of the economic melt down. As the dawn of the new century moved in, it is already looking quite favourable with 60.22% return in three years from 2000 to 2003 when the Index went up from 481 points to 772 points last year. And for those that maintained their long term strategy since 1975 when the SET first started until 2003, you would have made 20% return per year as the SET Index rose from 100 to 772 points. Don't know about you but I would be more than happy if my investment could grow 20% every year. Hence this sums up the old saying that “all good things come to those that wait”. However, there are certain things that should not wait such as waiting another 30 years before you start to invest! Don't procrastinate. If you want to invest in the stock market, do it today is better leaving it until tomorrow because tomorrow never comes and invest often because you can never buy at the bottom and sell at the top. Use dollar cost averaging technique to take advantage of market gyrations and time in the market is more important than timing the market.

Finally, the third point that you must remember in order to become a successful investor is to diversify . This age old advice about not keeping all your eggs in one basket is as good today as it was several years ago. Something will never change in all of us and that is how to control our greed and fear. If you bet everything on just one stock, no matter how good that stock is, it will be that much more difficult to control your greed when the going is bright and the fear of losing it all will be too much to take during a bear market. One of the best and cheapest ways to diversify your investment in a stock market is to buy index funds. These are funds that construct their portfolios to track the return of a specified index, usually the SET Index or SET-50 Index. They are fully diversified, meaning that you only take on market risk and not specific risks of individual stocks. Moreover, management fees are cheaper than actively managed fund.