Long term share investment is about compounding growth

The primary reason for people wanting to trade stock is to buy low sell high. So, they can earn the price difference. Market is driven by greed and fear. Many people made wrong decision because of emotional factor, which causes them to sell low and buy high.

Buying stock is different from buying things from supermarket. In supermarket, everyone has a benchmark on the value of goods, you will buy if the item is on sale, the price is now lower. Stock price is different, when the price is low, people are afraid it will fall further. This is because of the fear factor. On the other hand, if your favourite stock is going up each day, sooner or later you will get sucked into the rally and buy it too high.

How do we avoid that? We need to have a mental framework of establishing the value of stock. Once you have a benchmark on what price this stock is worth. When it is selling below the benchmark, you can take time to accumulate. When it is selling way above the benchmark, you can take time to unload it.

My colleague was asking me what share to buy every day. However, she doesn’t have much capital and want to make quick bucks. I said I don’t know how to do it. I have no idea what price this share will sell tomorrow and day after. She missed the point – we know buy low sell high will make money, but who can do it consistently? Not many.

Buy and sell too frequently will not get you too far. The attractiveness of long term investing is good company takes time to evolve and outperform. In my opinion, this is the essence of stock investing or rather you call it business investing. If you have bought a wonderful business that can grow your money at above average rate every year, the ideal time frame to hold it, is forever.

That’s what I am trying to say in this post. You keep good stock for long term and let the compounding effect work its wonder. If the business can achieve return on equity over 20% a year, just be patient, compounding takes time. Eventually you will find that your investment has grown to a big amount that you dreamed for.