Investment Strategy

Successful investors need these two things

Another day, another aerial bombardment of negative headlines issues itself from my screen. “IMF warns of global stagnation….North Korea lifts veil on arms programme…Japan facing end-game…Goldman Sachs to pay $5 billion fine…Megan Fox pregnant – Who’s the Daddy?”. Under such aggressive daily assault it’s natural for investors to just hunker down in their trenches. But peering out above the parapet, and into the open spaces of the bigger picture, is the best therapy for investor shell shock.

Do you want to be a successful investor? I assume you do.

When it comes to making money from financial investments there is one asset class that stands out.

Stocks…shares…equities – call them what you like: these tradeable pieces of companies are where the best profit opportunities are found.

Do stocks give you a way to “get rich quick”? Almost certainly not. There are no short cuts. But, if approached correctly, you’ll at least get rich slowly by investing in stocks.

Just as importantly…perhaps more importantly…if you don’t put stocks in your portfolio you’re almost certain to get poor slowly (or even quickly).

Long term returns on “low risk” cash and bonds are extremely poor, especially if you have to pay income tax on the interest. The historical record shows that stocks leave them both for dust.

So if you have any kind of substantial savings…an investment portfolio…a pension fund…then investments in stocks and shares must be a core part of what you do with the money.

That said, most people get scared by stocks. This is totally understandable, if ultimately undesirable.

They know that market prices can swing about wildly from time to time. For this reason stocks are seen as “risky”. Whereas, in fact, not owning stocks is the riskiest strategy around, viewed over many years.

Remember: cash and bonds deliver poor returns in the long term. Stocks – especially if you take the right approach – deliver significantly higher profits. Now which is more risky?

If you go about stock investing in the right way much of the real risk goes out of the window. You’ll have a lot less to worry about as well.

Above all else, there are two basic things you need to massively improve your chances of being a successful stock investor. Both are equally important.

  1. Buy stocks when they are “on sale”
  2. Be patient

OfWealth aims to help you find cheap opportunities with excellent prospects for profit. Fortunately the market is prone to major mood swings.

Today’s market darling is tomorrow’s devil incarnate. It’s when things are hated by the short-termists that the best opportunities can be found by those with cooler heads.

Today’s market darling is tomorrow’s devil incarnate. It’s when things are hated by the short-termists that the best opportunities can be found by those with cooler heads.

Who wants to pay full price when they can buy with a discount? Whether it’s stocks or socks, the same principle applies.

Sometimes the bargain can be a whole country or sector index, sometimes it can be a single but solid company. Either way, an excessive focus by traders on the short term prospects means that great bargains are served up on a plate to patient value investors.

You should also aim to identify expensive markets to avoid, since they’re highly unlikely to work out well for investors. That’s why I can’t get excited about US stocks (or bonds) at the moment: see here for my latest take.

So much for what’s worth buying, or not. When it comes to that other thing, to patience, it’s largely up to you.

I can point out the importance of this heavenly virtue. I can urge you to take a long term view.

Most of us have habits that we know aren’t good for us in the long run. Eating junk food, drinking too much, smoking, doing too much exercise (yes, even that’s bad for you).

We do our best to tame these urges. When it comes to investing, taming our tendency to impatience is the daily battle. Self control is the name of the game.

In the end, you’re the one that has to summon up reserves from your own well of patience. Sometimes, during testing times in markets, you need a very deep well indeed.

I’m not saying for a second that it’s easy. Far from it. I’ve often been tested myself. But I am saying that it’s essential to be patient if you want to come out smiling in the end.

So what about this claim that stocks are substantially better than bonds and cash? Today we’ll take a look at evidence from the Barclays Equity Gilt Study 2016. This is an authoritative source on historical asset returns that’s been continuously published every year since 1956.

This study has detailed data on the US and UK. For the US there are 90 years of data on returns from dollar cash, US treasury bonds and US stocks going back to 1925. For the UK there are 116 years of information on pound sterling cash, UK gilts (government bonds) and UK stocks going back to 1899.

Since 1925, US stocks beat inflation by 6.6% a year. Inflation itself averaged 2.9%, so the total return on stocks averaged 9.5% a year (compound).

By comparison treasuries returned 2.6% above inflation, on average, or 5.5% total. Cash beat inflation by just 0.5%, giving a total of 3.4%.

Results for the UK are very similar, if not exactly the same. Other detailed studies I’ve read show the same picture in countries across the world.

Bottom line: Stocks consistently beat bonds and cash by a wide margin.

US stock investors made 4% a year more than US bond investors, and 6.1% a year more than dollar cash.

That may not sound like much at first glance, but it seriously adds up over time. This is because of compounding, where there are profits to be made on the profits. (See here for a full explanation of compounding and doubling times.)

Here’s a summary of the effect over 90 years. “Nominal” means total return, “real” means after deducting inflation. Stocks beat bonds by over 30 times, and they beat cash by over 196 times.

Below is the same result in chart form.

(Note: it has a logarithmic scale. That means that as you move from left to right the same percentage move up or down always looks the same size, even though the absolute amount of dollars is increasing.)


Okay, so ninety years is much longer than your investing career, unless you are some kind of superhuman. But the effect is still large over the shorter time frames that apply to us mere mortals.

Are you in your 30s? If so, the chances are that you’ll live for another 50 years or so. An extra 4% a year on money invested today, with compounding, adds up to 610% more profit at the end.

…if stocks continue to beat bonds by 4% a year, you’d have more than seven times as much money when you reach your 80s as if you leave the money in bonds.

Put another way, if stocks continue to beat bonds by 4% a year, you’d have more than seven times as much money when you reach your 80s as if you leave the money in bonds. That could spell the difference between enjoying a full retirement full of luxury cruises and struggling to eat well.

Fifty years still too long to think about? Ok, so let’s say you’re in your 50s already. You could be investing for another 30 years or so. An extra 4% a year would leave the stock investor 224% better off than the bond investor, with 3.2 times as much money.

Even after 10 years, 4% extra a year would leave you 48% better off.

Of course anything could happen in the shorter term. Market prices go up and down. And not all stocks are always a buy, if they’re too expensive (see here for a comparison of US and Russian stocks).

Plus there’s not always enough cheap stuff around to have all your money in stocks. Now is one of those times. But there are pretty much always some opportunities, so it’s rare that you shouldn’t own any stocks at all.

So I come back to those two characteristics of successful stock investors: buy stocks when they’re “on sale” and be patient – ignoring price swings along the way.

If you follow those two simple guidelines, and you’re prepared to wait five years or more, then the chances are that you’ll be a highly successful investor. The profits will roll in and roll up.

More to come…

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.