If you have at least a $1,000 sitting in your bank and it is scratching an itch in your mind, consider parking it somewhere to roll bigger passively in a long term; a simple and easy way will be:
“Aha, stock market is where my money can grow!“
And this is what we have always been told “…let’s our money work harder for us“
Stock market is always the first in one’s mind to generate extra gold nugget from the $1,000. Some choose to be extremely active, as a stock trader, day in day out, or be other end, a super passive investor, holding long term and even forget about the stock while investing in the market.
Some newbies with zero experience come to stock market with a view of taking it as a long-term-money-generating-machine and pray hard so that the thousand could turn out to be an amount more meaningful if he/she holds the stock long enough.
However, the question does not lie on how long someone should hold onto the stock, but how long a company could, or be more precisely, the business behind the stock, is still relevant to the human’s need.
Let’s take a look at the classic example, once a photographic film giant maker – Kodak
Kodak is an American based company which produces camera-related products with more than 130-year-old history. It owned 90% of film and 85% of camera market within US in the late 70’. Anyway, that’s enough for Kodak’s history.
Based on the huge market share back in late 70’, imagine yourself as a long-term investor back then, would you be invested in one of the top film maker in the world? I bet that you won’t be letting this opportunity slip away from your hand!
Assuming you have done your due diligence, you did enough research and aware its position in the firm market, you decided to buy into Kodak’s stock at $22.12 in 1978 and held it long enough till 1997 at the peak of $92.88, you would have easily gotten 320% return without doing anything within the period, your $1,000 became $3,200. It is 3x of your capital. It was way superb! One thing you need to take note here – you did nothing, exactly nothing during this holding period! Hence, you might conclude that the long-term-holding-and-do-nothing strategy works! Investing is simple!
But, hang on!
What happened next after the peak (share price) was Kodak began to struggle in film market in the same year. The sales of photographic film declined and its slowness in respond to the disruptive effect of digital camera and eventually filed for bankruptcy in 2012 and their share price plunged as low as $0.55, it was almost a 100% lost of the initial investment if you apply hold-forever-and-ignore strategy, thinking of letting it (share price) runs and having the hypothesis of “Kodak should survive long enough to give me a great return.”
What is the learning lesson here? Complete ignorance!
Everyone knows that investing is simple but in fact, not easy. Whether to hold a stock for long term is not the essence of investing, the competitive edge of business model a listed company has towards the market needs is the key. As an investor, knowing how to determine the business moat of a company and define how long could the moat defence the business is a pre-requisite to be a successful investor with supreme return.
With the pace of technological advancement nowadays, business should adapt the change of business model and understand consumer behaviour in order to strive in the ever-changing business world, not only in the past but for the future as well. To be an investor, or the partner of the business, one should have the skill to foresee the potential business risks and challenges a business could face in the future to lower the investment risk. Even Buffett also said:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” — Warren Buffett
Having the right skill in analysing business model and know how to evaluate it make you an outstanding investor and beat so many novice investors out there.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.