Why should I stop trading and start investing for the long term? Isn’t it better to buy low and sell high? In this article I’ll explain why it is worth acquiring good-quality assets for the long time.
Trading vs. Investing
Benjamin Graham, the “father of value investing”, said “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” This basically means conducting good analysis before buying a stock. And of course there should be an adequate risk-reward tradeoff.Â
Meanwhile, his most capable student, the famous American billionaire Warren Buffett, keeps his investment holdings for years if not decades. In his view investing shouldn’t just be reasonably safe, provide an adequate return, and result from detailed analysis. It should also be buying for the long term.
In contrast, trading or buying for the short term can be considered ‘speculating’. Why is that? Well, it is possible to value an asset but it is virtually impossible to accurately predict where the price of that asset will head in the near term. For example, no one expected the coronavirus pandemic and that the markets would crash as a result. However, if an investor had a portfolio of undervalued good-quality stocks before the outbreak, they would have suffered limited book losses. If this investor holds these kinds of shares for a long time, they would end up benefitting from the gradual appreciation of their portfolio. Moreover, many profitable high-quality companies also pay dividends. This alone makes investing in these shares for a long time look worthwhile.Â
Finally, trading is also quite costly. Of course, it depends on your bank or brokerage account. But normally the more you trade, the more you pay.
How to make £1m
I’d indeed follow Ben Graham’s and Buffett’s strategy. By this I mean that I’d prefer investing in equities for the long term after conducting very thorough analysis. This would involve calculating the company’s price-to-earnings and price-to-book ratios. The dividend yield would also be important. However, I’d also check the company’s sales revenue and earnings history. After having a look at all these factors, I’d check the credit ratings agencies’ views of the company. The higher their ratings are, the safer the investment is. Finally, looking at qualitative information such as consumer tastes, the company’s product portfolio, and recent corporate news would also allow me to assess whether the company has a good future.
All that is really important. Equally important is keeping some of your ‘powder dry’. By this I mean keeping a large cash cushion. This is because there might be some market volatility ahead. A second COVID-19 wave, a prolonged economic recession, and a hard Brexit are risks that all add up to uncertainty. However, I would not recommend being afraid of them. Every stock market crash also offers some great investment opportunities. But in order to benefit from them, you have to have cash.Â
To sum up, my plan to make £1m includes buying ‘good-quality’ stocks for the long term but also keeping some cash to take advantage of the next stock market crash. I think that there are plenty of opportunities currently available for UK investors.