What makes long term investing click

Vikas SinghaniaTrade Smart OnlineA joke doing the round in social media is that if you are feeling dejected on not having too much money, than spare a thought for Ronal Wayne who in 1976 sold his 10 per cent stake in Apple for $2,300, which is now worth around $70 billion. No doubt the statement brings out the loss of opportunity by Wayne, but looking at it from a different angle it also gives us an idea of what long term investing can do. Had Wayne stayed invested his holding would have given a compounded annual growth rate return of 53 per cent over a period of 40 years. The above example beautifully explains the power of compounding and the advantage of long term holding. It is the same strategy that has been used by all successful investors over the years. One of the best known speculators and market participant Jesse Livermore used to say that it was never was the thinking that made the big money for him but it was always his waiting. Near a century later one more investing veteran Charlie Munger pointed out that the big money is not in the buying and selling but it’s in the waiting.Long term investing has withstood the test of time. Even now in India we hear of people finding their long lost share certificates which are now worth crores of rupees. Had they been found earlier it would have long been sold off. For a retail investor and especially those who invest or trade on a part time basis, long term investing makes more sense rather than trading which requires more time and concentration. Trading requires regular presence in the market and strict discipline. An investor on the other hand needs to be a passive worker. Ones the initial work of picking up a stock after thorough research, all he needs is patience. Time is the greatest friend of an investor. A well-documented study in the USA conducted on data between December 31, 1993 and December 31 2013 showed that staying invested would have given a return of 483 per cent on the index during this period. But if one would have missed the 10 biggest move during this period the return would have drastically dropped to 191 per cent. If the 30 best days were missed then the return would have reduced to only 20 per cent. An important point here is no one knows when the best days in the market are going to be. Missing a few of these can have a drastic impact on ones portfolio’s performance. The other advantage of longer term investment is that the average annual return over a longer period of time becomes less volatile. Research conducted on US stocks by Schwab.com have found that as you move from a one-year holding period to a three-year, 10-year and finally a 20 year holding period, the negative return experienced goes down. In fact, there’s never been a 20 year period with a negative return during the period 1926 to 2005.Another advantage of equity investments is the dividend that they give. Generally most investors withdraw these dividends and use it for some other purpose or use it to invest in other investments. However, reinvesting the dividends in the same company that has announced it yields much higher returns. These reinvestments act as a systematic investment plan (SIP) and helps in pyramiding ones position on the way up. In case the stock has fallen below the purchase price then these dividend reinvestment helps in lowering the cost of acquisition. Dividend reinvesting helps is double compounding your investment returns. Studies have shown that dividend reinvested in the same company by buying its share regularly for say 20 years doubles your return. Returns increases exponentially as the number of years increases. The period of 20 year is critical in long term investing. It is after this period that a stock actually starts to give phenomenal returns, what is known in financial parlance as the J curve effect. Post the 20 year period the returns are almost vertical like the straight line in the letter J. Leo Tolstoy would have been a great investor since he said that the two most powerful warriors are patience and time. Though long term investing looks simple, not many have the patience to wait for that long. But those who do so are reaping the riches.