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I. Relatively stable earnings
Seen from the historical data of SSE Composite Index from 1991 to 2009, if you go back to any time point a decade ago, you will find that the then market index was basically lower than that 10 years later. This could partly show the significance of a long-term investment: If the duration of investment is long enough and the possibility of losses is small, a long-term investment may bring a relatively stable income for investors.
In addition, according to the US stock market statistics, on the one hand, the lowest income and highest income are both positive when an investment lasts more than 10 years. That is, as long as the duration of investment exceeds a decade, an investor will be almost unlikely to suffer loss regardless of his or her entry into a bear or bull market and how the market fluctuates during the investment. The corresponding ranges of annualized return for different investment terms are [1.24%, 19.35%] for ten years, [4.31%, 17.52%] for 15 years, [5.53%, 16.65%] for 20 years, and [7.90%, 13.10%] for 25 years.
On the other hand, the absolute value of the difference between the highest and lowest income gains is gradually narrowing down. That is, with the gradual increase of investment time, the annualized return on investment will become stable. The stabilization of annualized return on shows that investors have more assurance about the future earnings. Namely, when the investment term exceeds 25 years, the annualized return of no lower than 7.9% can be derived in theory. On this basis, investors are able to set long-term investment objectives and develop a corresponding investment plans.
II. Preparations for a long-term investment
1. Based on the direction of economic development
Prior to a long-term investment, an investor shall first judge whether the Chinese economy has the potential to continue growing in the next decade or even longer. Based on the current macroeconomic development, emerging market countries, including China, Brazil and India, are coming to the forefront of the world’s economy. Combined with the development process in the past few decades, the Chinese economy is very likely to maintain a great momentum for growth in the future, which is the basis for investors’ long-term investments and sharing of economic growth outcomes.
2. On the premise of carefully selecting investment objects
Prior to a long-term investment, an investor shall first carefully select the products worthy of long-term holding. In fact, Mr. Warren Buffet, one of the advocates of the value investment theory, wouldn’t hold the shares of a company without in-depth understanding and analysis. In his view, when the stock value is below the intrinsic value, the stock has a “margin of safety”. So he suggests that investors should focus on the undervalued stocks.
Similarly, Mr. Philip Fischer believed that investors should pay more attention to the enterprises which have a growth rate higher than the average level and excellent management. In his view, investment decisions can be made only based on the financial statements of a listed company. Instead, investors should try to obtain its first-hand information from a variety of sources. Fisher’s suggestion has now become a necessary homework for a fund manager to select stocks. So, before applying the successors’ investment philosophy to their investment, investors should carefully select products worthy of investment and long-term holding. Only in this way can they reap more returns in the course of long-term holding.
3. In pursuit of holding rather than sales
It is generally believed that the fundamental purpose of a long-term investment is to hold assets rather than to sell. This is the essential difference between a long-term investment and a short-term investment, mainly as seen in the following two aspects.
(1) Different starting points: In general, a short-term investment contains many elements of “speculation”. Most short-term investors earn the price spread between the values of assets and make an income by “buying at a low price and selling at a high price”. However, a long-term investment contains many elements of “investment”. As mentioned above, long-term investors seek to analyze the asset value growth brought about by economic development and growth of listed companies and therefore make a long-term and stable income. Thus, compared with a short-term investment, a long-term investment is more focused on holding of assets, thus achieving growth of wealth through long-term accumulation.
(2) Cash is not the only measure of gross assets. Many investors think that “money in pocket” is the ultimate purpose of investment. That is, with respect to stocks, funds and other assets, cash assets bring an investor more “security”. But in fact, cash assets not only fail to realize capital gains, but also might depreciate due to inflation and other factors. On the contrary, if an investor holds assets with value-added capacity, the assets can always increase the investor’s total assets during the long-term holding, thereby achieving the purposes of maintenance of and increase in value. Therefore, prior to a long-term investment, investors must be clear about what a long-term investment is aimed for. Only in this way can they ease psychological fluctuations and analyze investment objectively and rationally in face of a rocky market in a short run.
III. Constituting only one type of investment
Prior to a long-term investment, an investor must be aware that long-term investment is merely one type of investment. As an approach, it helps investors achieve the purpose of asset value growth with long-term and stable returns and then realize their investment targets. Investors can adopt this investment mode and might obtain expected returns thereof, when they are unable to accurately predict the market.
(Source: Special Column of SZSE Investors Education, Securities Times, June 24, 2010)