Investing: “In the Long Run, We are All Dead”

 John Maynard Keys accurately summarized long-term investing with his statement “In the long run, we are all dead”. Purchasing $100 worth of shares in 1899 would produce a present-day return of $2,214,856. Unfortunately, you would not be around to enjoy these returns because you would die before the investment matures to this sum. Last week, Credit Suisse and Barclays updated their asset reports at their annual stock market conference.

The rate of inflation had little to no effect on the value of large-cap UK shares. These solid stocks outpaced inflation continuously for over a century. Despite this fact, the equities still failed to produce substantial funds for investors. Unfortunately, the majority of stockholders refuse to abandon the age-old method of buying and holding stocks forever.

Respected professors from the London Business School produced a study showing how much US-centric investing ideas influenced the entire trading culture. Since 1900, the longest decline for stocks in the US market lasted 16 years. In the UK, the record is 22 years–which is quite appalling, but it is still much better than the recorded results from other countries.

In Austria, investors lost 97 years worth of growth due to the loss of their empire. Belgium experienced a 58 year decline because of a civil war. The loss in Spain lasted for 57 years, and the German decline lasted for 55 years. In both cases, war or civil unrest was the ultimate cause of the falloff. In truth, there is no real safe holding period for investors outside the US or UK. In these countries, investors must utilize different strategies if they wish to draw a profit.

Buying a value stock and holding it until the price rises is a common investing strategy. Unfortunately, this method will not always work, especially if stocks keep declining over long time periods. Investors using this method will need extremely diverse portfolios, and they may need to invest in a large amount of overvalued stocks just to stabilise their investments.

Since the global market is so volatile, it makes little sense to have a dominant trading idea for the entire world. Emerging markets should be growing at a faster rate than developed markets like the US and UK, but this is not the case at all. Even with the dotcom bubble and Lehman Brothers scandal, these markets still remained relatively strong. So-called emerging markets did outperform developed markets during these times. However, the rate of return was quite small–about 1.5 percentage points per year respectively.

Ultimately, the buy and hold concept cannot work for every market in every country. It may sound like a smart strategy, but if a crisis occurs, investors will panic and pull out of the market. Since the market is so volatile, you can only be somewhat predictable when you invest in strong economies that tend to grow fast for a reasonable period of time: happy hunting.

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