And the most important additional trick is to buy cheaply in the first place, so that gains achieve the maximum compounding effect over time. Day traders will lose money in the long run. But long term investment also has snags.
It is like the old childhood story of the hare and the tortoise. The hyperactive hare is like a day trader who trades frantically in and out of assets, losing his capital in commissions. The tortoise is a Warren Buffet, who bought his best investments 40 years ago and has slept soundly since then.
If it is that easy why do so few people take a long term approach? Actually most people do, when they buy a house on a mortgage. For a mortgage forces an investor to take a long term view and not to panic and sell out at the first sign of lower house prices.
Over time the gains in house prices, largely due to general price inflation, outweigh the periods of weakness, and by the time the mortgage is finally paid off the house owner is another happy property investor. Of course, if they paid too much to start with the returns are significantly lower.
Counteracting mood swings
But it is the actual investment approach that works as it counteracts the mood and lifecycle swings that influence short term trading decisions. For if you have bought a house on a mortgage you are stuck with it whatever the mood of the day, and face considerable stress and probably financial penalties if you decide to sell.
Buffett and other famous investors like Sir John Templeton have applied a similar degree of patience to common stocks, with some spectacular success. But again the important consideration to maximise returns is to buy for a low price.
In the 1988 book 'Global Investing, The Templeton Way' Sir John gave his forward projections as to where stock indices should be in 20 years time, based on the long term performance of stock markets. He saw the FTSE at 3,200 in 10 years and 6,000 in 20 years; and the S&P 500 at 416 in 10 years and 775 in 20 years.
How interesting to note almost 20 years later that the FTSE is in the 6000s, while the S&P 500 is around twice the level he forecast. On that reckoning US shares are 50 per cent overvalued while UK stocks are at fair value.
From this analysis then, a long term investor might be best advised to wait for a short term weakness in UK stocks to buy a bargain; and avoid US stocks all together. Of course, there could well be better bargains in other markets, but US stocks do seem to have become inflated in value by quite a large margin.
There are many hazards to stock selection, and buying any share in an overvalued market is one of them. Even the great Buffett has become a convert to overseas investment in recent years. Twenty years ago he only invested in the US market, but he still has large US holdings, though admittedly bought at very low prices.
So does that mean you could not achieve a high rate of return by investing in US stocks today? May be it does as everybody invests in US equities and it is mathematically impossible to achieve above average performance by following the majority.
See also:Investment fundamentals the Templeton WayBuying a stock market bargain