Because of my general belief that stocks will yield the highest returns over time, I wanted to focus more on some ways that we can take advantage of this, and some ways that I don't think add value.
Buy & Hold
We remember the AIC ads from the late '90s which urged us to 'Buy, Hold & Prosper'. This is an age-old investment philosophy which focuses on the idea of buying stock in a number of companies and then pretty much just holding them for a very long time. Originally, I was a bit of a non-believer. However, more and more of my older clients would buy stocks back in the day and actually receive the certificates in the mail, which they usually stored in safety deposit boxes. Most of them never really cared what the market did; they just figured that they'd buy some stock in whatever company looked interesting when they had some spare cash. Now - say 25 years later - they deliver the shares which (so far, without exception) have substantially increased in total value. This doesn't mean all the shares are worth more but the ones that are have usually increased by a far greater amount than the bad ones have fallen.
I can't tell you how many times this has happened. The theory (whether these investors really knew they were doing this or not) was that over time, companies would either prosper or fail but the net result would be a gain. If you bought 10 stocks in the 1980s and even 2 of them were Canadian banks, then today, you probably have increased the value of your portfolio by about five times, even if a few of those other 8 stocks went bankrupt.
I don't think this is a bad investment strategy. It is certainly low cost, since once you own the stocks, you don't pay any fees. I think in general, people watch the market too much and it is too easy to buy and sell their stocks because of some external factor. It actually leads most people to stop buying stocks all together because they have no faith in the returns of equity markets. Actually, over the past 50 years, stocks in Canada have been far and away the best place to invest.
We don't see this result over the short term, however. All we hear about is how much debt the world has or what countries are still in recessions, etc. We end up just buying more house than we probably should and investing all our spare cash in paying down our mortgage. It isn't a bad strategy because if things get really bad, you can just live in your investment (unless your mortgage is a little too high - see the U.S. subprime crisis). We don't have a screen that tells us what our house is worth every day and we can't buy and sell houses by the touch of a button. So we naively think that real estate is a better performing investment. I suppose the next 50 years could be different than the last 50 years but I doubt it.
Buy and hold is advice that I think more equity fund managers should take themselves. As a portfolio manager myself, I feel the pressure of being compared to benchmark indices on a monthly or quarterly basis. It's totally counterproductive though because when I start buying stock in a company, I don't do it with the idea that I'm only going to hold it for a few months - exactly the same as when I'd buy a house. And yet, every month I want to see how my clients' portfolios performed against the index, instead of just sitting back and watching my portfolios grow, focusing on our country's best managed companies.
The polar opposite of buy-and-hold is day trading. The epitome of this is the commercial with the little baby who has opened up his online trading account so he can buy and sell stocks on a daily basis, trying to eke out a paper thin profit which he hopes will add up over time. In my mind, the ad represents kids who are putting a little money in an account to try and make it grow overnight. It is so much like gambling in this way because the only people that end up making money on this system with any guarantee are the brokerages that take a commission every time these kids do a trade. Want my advice? Focus more on finishing university, getting a real job and making actual money which you can invest properly.
The end message is probably that regardless of what side of the desk we sit on (investor or advisor/PM), we should probably watch markets less. They are great at giving us a meaningless number of what our companies are worth, when we have no near-term plans of selling.
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