Investing is a marathon, not a 100m sprint

Extracted from Tong's value investing portfolio (The Edge Malaysia, May 22, 2017)

It's easy to make money when markets are rallying.  If you had bought some stocks in the past few months, chances are you would have made money too.

Make no mistake though, just as the past few years have been very difficult for investors at large, this rally too will eventually come to an end.

I started this portfolio (refer to Tong's Value Investing portfolio) back in October 2014, a rather turbulent time.   Three months later, by end-2014, the FBM KLCI index had fallen 3.7%.  The benchmark index went on to lose another 3.9% in 2015 and yet another 3% in 2016.

I'll wager that for many investors, this hasn't been a rewarding period.  Yet, others may have chosen to stay on the sidelines.  That would've been a mistake.

Cash generates woeful returns.  Money in the bank earns negative returns, once you take into account, the real inflation rate.

Investing is the best way to create wealth.  But it's also a matter of how you do it.

From my years of experience, the wisest investment strategy is not about making as much money as possible in the short term.

It's about how consistently you make money over a very long period of time.  Importantly, that includes making money even in the worst of times.

On top of that, you need to minimise the risk or volatility of your portfolio.

Last but not least, you harness the power of "compounding" - the snowball effect - by reinvesting profits and earning returns on them over long periods of time.

Even if you make 10% returns annually (or reinvest all your gaints) consistently, you will double your capital in 7 years.   This is a mathematical certainly.

Remember, compounding works on the big assumption that you do not go broke during the time frame, which you will if your aim is to maximise short-term profits.

For example, if you want to make a 50% gain, then you must take on a lot more risks.   As we all know, risks and returns are two sides of the same coin.

Say you do make a 50% gain in the first year on RM100,000 capital, you will have RM150,000.   But if you lose 50% in the second year, you're down to only RM75,000.   You've actually lost part of your initial capital, which means now you have less to invest and therefore need even higher returns (and higher risks) to make up for lost ground.   You can keep doing the math.

Roll the dice enough times and you'll soon find yourself on the path to financial ruin!

As I said last week, there is no certainty in investments.   We clearly cannot always be right.   We will inevitably miss opportunities and we will get our timing wrong.   We will make losses on some investments.

The keys to profitable investing are consistency, not suffering huge losses and minimising risks.

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Remarks: A tribute to Tong.  His portfolio is up a hefty 60.1% in under 3 years.