How long should investors hold their stock investments?

Eddy said: One of the obvious issues when using historical data to convince me about the investment success story is whether the historical data involves survivorship bias and other cherry picking tricks. Also, a thought provoking question is whether the idea of long term investment can be reliably associated with investment success.
Borrowing some ideas from VaR analysis, the longer you hold a particular security or portfolio, the likely the chance you will exceed the VaR limit as the worst loss.
Yes, longer investment time horizon can smoothen cyclical, seasonal and unexpected effects to achieve expected return. The problem with the statement just now is whether you are able to define the expected return. Take an example, you expect an unrealistic 15% annual compounded return for an investment time frame of 20 years and at the end of the period you being disappointed by the fact that the actual return was just 10% annually and you might start to shout about the misleading idea of long term investment. The truth is you already made a major mistake by having a distorted profit expectation biased by certain factors, such as short term supply and demand effect or macroeconomy illusions.

OFTEN we hear some financial experts say we need to hold stocks long term, especially during the weak stock market situation like what we are experiencing currently.

Some gurus say the “buy and hold” strategy is the best investment strategy. However, some retail investors may argue that “buy and hold” is not suitable in Malaysia because if they pick the wrong stocks, some companies might even get delisted after a while.

The question of how long to hold has always been on the mind of investors when they purchase any stocks. Given the present weak economic and stock market conditions, some investors may lose patience as they do not know when the market will recover again.

In this article, we will look at the number of years that we need to hold our stock investments in Malaysia. We use the KL Composite Index average daily indices to compute the stock returns.

The following data was provided by Dynaquest Sdn Bhd. With its permission, we will provide the historical rolling annual compounded returns from 1970 to 2008.

The table shows the rolling historical annual compounded returns for holding the stocks for one, three, five, seven and 10 years.


Click here to view the table.

It shows the average annual compounded returns and risks (measured by standard deviation) regardless of any starting or ending dates.

For example, the 25% returns in the second row and the second column of the table was the annual compounded returns of investing for one year from 1970 to 1971. The three-year returns of 56.7% was what you would’ve got if you started your investment in 1970 and ended in 1973.

If you started investing in 1970 and held it for five years (up to 1975), seven years (up to 1977) and 10 years (up to 1980), your annual compounded returns will be 16%, 14% and 21.8% respectively.

In terms of the overall average returns, except for one-year and three-year holding periods of 13.4% and 9.8% respectively, we notice that the annual compounded returns for five-year, seven-year and 10-year holding periods were almost the same, about 8% per annum.

However, the longer we hold our investment, the lower the risks that we face, which are measured by using standard deviations.

For example, if we hold our investment for one year, the standard deviation is 30.8%.


However, if we hold it a bit longer to three, five and seven years, the standard deviation will drop to 16.8%, 11.4% and 8.6% respectively.

For 10-year holding, the standard deviation is 6.6%. Based on two standard deviations, we are 95% confident that our returns will range from -5.1% (8.1% - 2 x 6.6%) to 21.3% (8.1% + 2 x 6.6%).

This is supported by the minimum returns of -2% and the maximum return of 23.6% for 10-year holding periods.

In conclusion, we need to hold stocks long term. We may not need to hold them up to 10 years.

However, we need to understand that we will face very high volatility on returns if we invest only for one year.

Besides, we need to make sure that we are buying good fundamental stocks in order to avoid poor quality stocks that are not suitable for long-term investment.


Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting. We welcome readers’ feedback. Please e-mail to starbiz@thestar.com.my

Integrated Asean capital market plan

Eddy said: Imagine 4 easily crackable pillars used to build a house, you think it will makes the house better resistance to disaster? Each of the exchanges got their own problems which I think currently remain unresolved or unidentified and how could they even propose to integrate them. The integration shall makes them even more vulnerable. Mate, think harder.



KUALA LUMPUR: Bursa Malaysia Bhd, Indonesia Stock Exchange, Philippine Stock Exchange Inc, Singapore Exchange and the Stock Exchange of Thailand (SET) yesterday signed a preliminary agreement to set up an Asean electronic trading link to enhance the competitiveness of their capital markets.

In a statement, Bursa said the e-trading link, through a single access point, allowed intra-Asean cross border trading and would attract more international funds into the region.

According to Bursa chief executive officer Datuk Yusli Mohamed Yusoff, an integrated Asean capital market will raise the profile of this region’s securities to the global investment community.

SET president Patareeya Benjapolchai said the linkage was open to other Asean bourses besides the five that signed the memorandum of understanding.

“We are now in the process of evaluating a technology platform and scheduling the implementation among the exchanges. The e-trading link is expected to go live next year,” she added.

Singapore Exchange chief executive officer Hsieh Fu Hua said the five exchanges would work towards establishing their clearing houses as central counterparties to facilitate the clearing and settlement of cross-border trades.

“Brokers will benefit from building on their relationships with their home clearing houses and need not take on foreign counterparty risks,” he said.

Patareeya said the partnerships would be “a win-win solution for all” including the listed companies, investors and market participants.

HP Plans to Cut Pay for 300000 Workers Worldwide

Eddy said: The company is making money and yet planning to take away the fair share from its employees. Constrast this to the scene where the top executives in US government rescued or bail out banks with wide opened hands waiting for a fat bonus, apparently to be forked out by tax payers. Sadistic right?

Speaking of Corporate Social Responsibility....

Well, if I'm the shareholder of such company, why would I stop the company from doing so? They are merely try to make sure the company earnings are sustained and so to get their contract renew or better share price performance. Happy for shareholder, sad for (committed) employees. Life's cruel.

HP has announced that it wants to cut the pay of about 300,000 workers across the world. The largest union in the UK called Unite is saying that it is astonished that HP would try to cut the pay of so many workers.

The reason for the astonishment is that HP is not in the red, the company is still turning a profit with a revenue growth of 1% compared to last year. Gross profits were reportedly GBP1.3bn. According to a Unite spokes man HP says any pay cuts in the UK will be with employee agreement.

Peter Skyte a spokesman for Unite said, "UK employees who have made a key contribution to the doubling of the HP services revenue and borne the brunt of redundancies in Europe will be astonished that a company that is increasing revenue and still making substantial profits is seeking a pay cut from its UK workforce. Whilst the basic pay of senior executives is being cut, they will more than make up any reduction in basic pay by increases in their executive bonuses brought about by reductions in everyone else's basic pay."

Via Unite

Weird IBM RPM Catastrophics Error

Our latest IBM RPM customer is opted for a relatively smaller investment in the solution, their system configuration of RPM involved the following components:

DB2 Express-C 9.5
Tomcat 5.5
JDK 5.0
Windows 2003
IBM RPM 7.1.1.2

Based on the instructions of the official guide of IBM RPM 7.1.1.2, there are some additional steps needed for the proper installation of the solution. You can refer to the guide for further information.

The installation took almost 1 day due to our unfamiliarity with such environment because we usually deal with IBM WAS and DB2 ESE. So we did it slowly to avoid unnecessary mistakes.

The installation was a successful one with no error in the logs.

However, a post installation testing procedure revealed some drastic and yet can be frigthening issues, some of them includes:

* When clicked on Investment Map in the Dashboard, it will respond with a EOleException Catastrophics error with some Windows hexadecimal code that translated to a very general error message.

* When try to save text key in the rich text control in the portlet, it will not be saved.

* More EOleException Catastrophic error in other features.

Very interesting indeed because none of the logs (Windows event, tomcat logs and DB2 logs) were unable to reveal any useful hints on the error.

We decided to open a case with IBM Support since the team will be busy doing other functional works.

The communication was established for almost 2 months with no apparent solution to the problem. We did the regular log compilation, scenario description, screen shots blah blah.... At the end, the support even suggested that the DB2 Express-C v9.5 is not supported by the RPM and thus unable to escalate it further. :-S

Since the project is almost near the completion and the risk of this error haunting us is getting more obvious and serious, the team decided to commit more efforts to fix it.

Here are the problem solving sequences we took:

Note: Our VM Test environment doesn't have the EOleException problem. Thus we believe it is environment specific, not a product bug.


1. Disable all irrelevant services in the OS and test
- Unchanged. Rule out the problem of software conflicting
- Enable back everything

2. Run the RPM Client outside the server machine, i.e. client workstation
- Unchanged. Confirmed it is server based problem. RPM Standalone and Plugins behaves the same.

3. Accidentally we had tried this scenario and found out something interesting.
We opened up the RPM Client and triggered the EOleException catastrophics error and then clicked Ok to continue. Then we recycled the Tomcat while the client was opened. The error will not triggered again and everything is fine, including the rich text control saving problem.
- This has revealed an important hint that the problem is caused by something shared between the client program and the Tomcat in the server.
- Since the client program is a Windows executable, possibly this got to do with some DLLs or something that the client program "loaded" before the Tomcat. I can't be sure since I don't have access to the source codes.

4. We checked the java.library.path from the Tomcat logs and found that there are another copy of xercesImpl.jar and xmlApi.jar in the path. To play safe, we removed these files and tested again. No luck.
- Rules out the problem of JAR class loading because logically the client program and Tomcat doesn't really use them together (I think).

5. A tip that we learnt from the Support is that we can stream out the logs generated by the client program using the "RPMStdIn.exe > logs.txt" and this log will contain information such as stored procedure called with parameters.
- By triggering the error, now the logs.txt contains the stored procedure that causes the error.

6. From 5 above, we copied the call information and executed it directly in DB2
- No errors returned from DB2. This confirmed the problem with how Tomcat or something inside Tomcat interpret or handle the SP call.

7. Confirm the JDBC Driver
- No problem as we directly used the drivers from the local DB2 Express-C.

8. Ruling out so many things and we start to suspect something more fundamental causes this, i.e. the Java execution environment. A check on the Tomcat JRE indicated the use of JRE 1.5.0.2. Cross referenced to Tomcat 5.5 and RPM 7.1.1.2 and none of the manual said anything about a particular level of J2SE 5.0 to be used.
- Since we running out of options, we decided to upgrade the JRE to 1.5.0.16 since that version was used in our VM too (LOL, we realized that too late I guess)
- Bingo, the error is no more.
- To reconfirm, we installed JRE1.5.0.2 in our VM and let the Tomcat used it and we managed to resimulate the problem, which is something that we were unable to perform since the reporting of the case to the Support.
- Note: The mode of the Tomcat in the environment is using jvm.dll. I'm not sure whether the same problem will happen with other modes.


All this havoc just because of insufficient information from the official about supported environments for RPM. Aiks.

P/S: IBM RPM guide never mentioned about the DB2 editions supported and this might be a grey area on the supportability of any RPM deployments.

Professionally, I strongly believe that CA Clarity did a great job on explicitly documented down the supported environments to the details on levels, fix packs, versions and so on. It can help to get rid of weird problem(s) like the one we encountered here.

Steps in the management of Financial Risk