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Successful Investors Are Successful History Students
Malaysia Perspective | 26 September 2012

By Xeo Lye

Recently, I picked up a personal finance book written by a local author from a local bookstore. I have not had a chance to read a personal finance book for a considerably long period of 5 years, and was very curious as to what type of advice some of the local financial gurus were dishing out to the public. Needless to say, the advice was very much the same, compared to 5 years ago: Buy and hold for the long term, diversify. The only new idea which came out of the book, thanks to the effects of the great financial crisis, goes like this: Financial consultants and bankers are crooks! Do not trust them! Only trust the advice of those who are not involved in the banking and insurance industries.

Paying High Price for Bad Advice
The world of financial information is a messy place. It’s a place where everyone tries to convince you that they are in the right. Crowds such as your own friends, relatives, colleagues, financial advisors, the media, financial institutions and financial gurus are more than willing to volunteer their “expertise” and dish out their version of wisdom, without verifying their own facts beforehand. It is not a wonder that there are people approaching and telling me that the more that they learned about investing, the more confusing they became.

There are many who do not bother to check on the facts prior to the acceptance of any investment idea as the conventional truth, and the only path leading to big, handsome investment profits.

Consider one of the conventional truths we are being told:

“Stocks over the long run, will always go up, so just buy and hold”

At this point of time, I will roll my eyes and just shake my head. It is so true, yet so misleading. This is true because the world’s biggest and most established stock index, the US Dow Jones industrial index, has been going up for the past 100 years and has averaged at about 8-9% returns every year.

However, consider this again with a fact that I am about to share with you: Imagine that you are the citizen of one of the richest nation in the world. At the age of 25, you started on your retirement planning and faithfully invested your money in the local stock market, in hopes that at the point of your retirement, you would have doubled or tripled your money with a nice retirement nest egg. 25 years later at age of 50, while you are reaching your retirement, you took a look at your investment portfolio and would be shocked to see that your investment portfolio hasn’t grown at all. In fact, it is losing money. The country in question is none other than Japan, one of the richest and most prosperous nations in the world. The problem with the conventional truth of buying and holding for long term only works if you are investing in the American stock market. Thus, in another word as to put it, in order to emulate the performance of the US stock market, the said country should be demographically, geographically, culturally and economically similar to that of the United States of America. How could that be possible in the first place!

The other problem I have encountered with the statement is the definition of long term. I am not sure if it is left intentionally vague for the purpose of marketing and trying to convince investors to keep their hard earn money in the market. In my opinion, 25 years is a very long term and if you cannot make money after 25 years in the stock market, then the conventional wisdom of buying and holding for long term should never be deemed as the universal truth.

On the other hand, this statement has certain strong arguments backing it up. The stock market is a reflection of the productivity of the nation. By reducing the amount of resources it uses to produce a single unit of goods, the price of a company will go up when it makes more profits. Productivity has gone up, profits have gone up and so did the stock price. The most important determinant of productivity is technological advancement. For as long as us humans could produce the ideas to do more with less resources, the advancement of technological improvement can never be halted. History has proven that humans could become the dominant species on planet Earth due to their creativity and innovation and therefore should continue to have technological breakthroughs into the foreseeable future. Thus, it is also true that in the long term, should technology improve, the stock market should tend to rise as companies become more productive in the future and buying and holding for the long term should work too!

By now, you should be utterly confused. So, should I believe that buying and holding for the term actually works, or should I throw out this idea and look for a new investment strategy? That is probably the most important hurdle every good and successful investor goes through at one point of time and this will probably determine if you can retire rich, or be permanently disillusioned with investments and deposit your hard earn money into safe, but non-inflation proof fixed deposits.

The point I wish to bring across with this article is to help investors understand that the investment theories generally works only if the investor truly understands the context and content of how the investment theories are being formulated, and apply these theories carefully and selectively. There is generally no one magic formula that will always work and the only way to understand the context and content of these investment theories and ideas is to study the history on which these strategies have derived from.

Playing the Investment Game
Which is why after many years of being a good history student, I have developed a financial game called: CAPITAL GAINS GAME. Together with Financial Youth Intelligence, we are rolling out Capital Gains Game Competition from October 2 until October 6 this year at Taylor’s University, UCSI University, Sunway University & Monash University with a mission to educate the youths to grab hold of the opportunity to learn more about the history of the financial world spanning across different asset categories: Stocks, bonds, properties, gold and even oil. It is also a more interesting way to go about learning about history than trying to go through stacks and stacks of financial history text books and hopefully, jump-start people who are genuinely interested to become successful investors to move on to the next stage of their investment learning.

The Bottom Line
So, the next time when somebody is trying to convince you that their investment strategies are the only way to go, check with the history books before putting your hard earned money into that investment. Or else, you may end up as a sad, elderly Japanese investor, who is unable to retire because he had put in a bit too much faith into a conventional wisdom.

Xeo Lye (BBA, CFP®), is the founder of Capital Gains Game, a game that allows participants to immerse in one of the most turbulence time in the history of the financial market by competing against other investors investing in equities, properties, bonds and gold across a period of 20 years. Financial Youth Intelligence will be organizing this competition for the very first time in Malaysia from October 2nd – 6th 2012. Please visit or contact Tang Ching Huei at or 016-5188308 for more information.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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