Investment Iron Law VIII: Profit When You Buy, Profit When You Sell#
Some people do nothing all day,
understand nothing about investing,
yet become billionaires.
Buy Randomly, Buy Anytime, Don’t Sell#
You may already understand the principle of wealth creation: invest money in high-return investment vehicles and hold them for the long term. But you might still have questions: How should you invest? When should you buy? What should you buy? When should you sell?
The Highest Realm of Financial Management
I propose an investment strategy here. This method is arguably the simplest, as everyone can do it; yet it is also the hardest, as few can truly follow it. This strategy is: “Buy randomly, buy anytime, don’t sell.” You might ask, “What’s so difficult about buying randomly, buying anytime, and not selling?” If you think it’s easy, try it yourself. If you can genuinely do it, then congratulations! You have grasped the essence of investment and financial management, reaching the highest level of investing prowess.
The average investor’s favorite questions are: “What to buy?” “When to buy?” “When to sell?” Imagine if someone knew the answers, they would surely keep it a secret and profit themselves. Would they tell you first? Investors often assume experts know when the market will rise or fall, and which stocks to buy. It’s as if those who don’t know these things are not worthy of being called experts or analysts. However, only true experts admit they don’t know when the market will rise or fall. Precisely because no one knows future market movements, investing is worthwhile. It’s this uncertainty that creates the potential for high returns. Otherwise, all investment profits would be taken by those with foreknowledge.
Most people believe that to profit from investing, you must accurately predict market timing, select the right investment targets, and know when to sell. But based on my more than ten years of experience in investment, investment management, and investment research, capturing the perfect entry point is nearly impossible. Even investment gurus like Warren Buffett and Peter Lynch admit they don’t know when stocks will rise or when to sell.
You might be puzzled by how some people, seemingly doing nothing and lacking investment knowledge, become incredibly wealthy. The three principles presented in this book – “buy randomly, buy anytime, don’t sell” – are the key factors to their success.
The Wealth Creation Method of Hou Boming, Executive Director of Tainan Spinning
The three Hou brothers, Boming, Boyu, and Boyi, are the largest shareholders of Tainan Spinning, possessing a fortune exceeding 15 billion. Despite being major tycoons in Southern Taiwan, they maintain a low profile. Hou Boming, in his 40s, can sometimes be found playing pinball at night markets.
Hou Boming’s grandfather, Hou Yuli, was a founding figure of Tainan Spinning. After the successive deaths of his grandfather and father, Hou Yongdu, Hou Boming, his two older brothers, and his mother inherited a quarter of Tainan Spinning’s shares. They remained passive shareholders, not participating in the company’s management, staying completely silent. Their immense wealth only came to light when Hou Yuli’s daughter, Hou Yingzu, sued her brothers, Hou Yongdu and Hou Yongsong, and her nephew, Hou Boming, for allegedly misappropriating family assets.
The Hou brothers’ investment strategy is simple: buy stocks and hold them long-term, accumulating wealth through dividends. Some criticize them for lacking business acumen and real estate development skills, but with this simple method, they became one of the top 20 richest families in Taiwan.
Had they heeded others’ advice and sold their stocks to pursue business ventures, they might have lost their position among the top 20 wealthiest, perhaps becoming another example of “wealth not lasting three generations.” If they had deposited their money in the bank, the wealth accumulated by their grandfather 40 years ago might have dwindled to almost nothing due to inflation. With a real return rate of zero in a bank, depositing NT$500,000 annually would take 200 years to reach NT$100 million.
To the average person, the Hou brothers’ approach may seem unremarkable. Yet, their wealth hasn’t diminished due to inflation; instead, it has grown year after year. Their grandfather was a multi-millionaire 30 years ago, but their generation has become multi-billionaires. The key lies in investing in high-return vehicles – stocks – and holding them long-term.
Blindfolded, throw a dart,
Buy whichever stock it hits.
What to Buy - Buy Randomly#
Everyone says choosing the right investment target is crucial for success, and I agree. But how to choose is a difficult and complex question. The strategy I propose is exceptionally simple, so simple that you might not be able to follow it: “Buy randomly.”
More Accurate than a Broker’s Eye
“Buy randomly” is so simple! Some suggest pinning the stock market section of The Wall Street Journal to a wall and throwing darts at it, buying whichever stock the dart hits. Scholars conducted an experiment where a monkey, blindfolded, threw darts at stock listings. The resulting portfolio performed remarkably well, even outperforming portfolios managed by professional fund managers.
Why is “buying randomly” a good stock selection method? If you’ve studied portfolio diversification theory in finance, you’ll understand that as the number of stocks in a portfolio increases (beyond 10), the impact of individual stock factors diminishes. In other words, as long as you diversify, stock selection ability becomes less important. Random selection works. Especially with 30 or 40 different stocks, the overall performance will closely mirror the market.
Buying randomly sounds simple, even a monkey or a fool could do it. But in reality, it’s extremely difficult, so difficult that only a fool could actually do it. I must admit, while I believe in the principle of “buying randomly,” I can’t bring myself to do it when investing my own money.
As mentioned earlier, to help my child reach billionaire status by their 40s, I buy them stocks worth tens of thousands of dollars annually. To practice “buying randomly,” I spread out the stock market section of the newspaper and ask my 4-year-old to pick a stock. However, each time they point to one, I move their hand, saying, “Why did you pick this one?” Then I ask them to pick another, but I’m still not satisfied. This is because I can’t bring myself to buy the stocks my child randomly selects. In the end, it’s me, the self-proclaimed “investment expert” dad, who selects a stock after careful analysis and research.
Despite this, I record the first stock my child picks each year. It’s been five years now, and I haven’t sold any of the five stocks. Surprisingly, the performance of the five stocks I carefully selected is about the same as the five randomly picked by my child. This further validates that “random selection” is not only simple but also performs well in the long run.
No One Can Guarantee Gains or Losses
The purpose of suggesting “random selection” is not to encourage you to literally throw darts at stock listings, though it’s not a bad method. My real intention is to highlight that random selection is sufficient when choosing investments. You don’t need excessive caution or to follow expert advice that demands painstaking research. The reason is simple: as mentioned, if you had chosen Cathay Life Insurance 20 years ago and held it, you would be a billionaire today. Conversely, if you had chosen Kuosheng 10 years ago and held it, you would have lost everything. Many experts use this to justify advising investors to be extremely cautious and meticulous in stock selection. The problem is, no matter how knowledgeable or cautious you are, you can’t guarantee picking the next Cathay Life Insurance or avoiding the next Kuosheng.
A key point to consider: You don’t need to pick the perfect stock like Cathay Life Insurance to become wealthy. As long as your investment returns are close to the overall market average, you can still become a billionaire. To achieve this, you simply need to “diversify and choose randomly.”
Average investors often fail to understand this, leading them to be overly cautious, spending significant time, effort, and money on analysis, research, seeking hot tips, and consulting experts. This usually leads to two outcomes:
- Confusion: Opinions on which investments are good vary widely, leading to indecision. Unable to find a “safe” investment, investors often resort to the riskiest long-term move – leaving their money in the bank.
- False Sense of Security: Sometimes, an investment appears excellent from all angles, with most experts endorsing it. This perceived safety often attracts cautious investors, but these “safe” investments can be the most dangerous. Remember: Investments everyone considers good are often the worst. In mid-1995, almost everyone viewed semiconductor stocks like TSMC and UMC favorably. Many cautious investors flocked to these stocks. A year later, the market was up 30% on average, while TSMC and UMC plummeted, halving in value.
While simple, buying randomly is a difficult investment philosophy to embrace. But it teaches us a valuable lesson: Don’t overthink stock selection. Diversify your portfolio and choose randomly. Investing can be that simple.
The ratio of up days to down days in the stock market is approximately 55:45.
When to Buy - Buy Anytime#
Many claim that choosing the right entry point is crucial for investment success, and I agree. However, timing the market is equally difficult and complex. My proposed strategy is simple, so simple you might find it hard to follow: “Buy anytime.”
“Buy anytime” means investing your money whenever you have it, regardless of the day or time. In other words, don’t keep your money in the bank. Invest any surplus funds beyond your daily needs, regardless of whether you think prices will rise or fall.
Buy and Wait for the Opportunity
Investors often ask, “When should I start investing?” My answer is “Now!” Short-term stock prices fluctuate wildly and are unpredictable. You could say, “The only predictable thing is unpredictability.” Since stocks generally rise in the long term, and future price movements are uncertain, the best approach is to invest and hold long-term, regardless of short-term fluctuations, and wait for the long-term upward trend to emerge.
Stocks tend to have higher returns over the long term, with a higher probability of rising than falling. Statistically, the ratio of up days to down days is approximately 55:45. Therefore, if you ask me if the market will rise or fall tomorrow, my answer is usually: “I don’t know, and nobody in the world knows.” But if you insist on a guess, the statistically safer bet is that it will rise.
Since the guess is always for a rise, the safest approach is to buy whenever you have money. When the probability of rising is higher than falling, and you can’t predict tomorrow’s movement, the best strategy is to “buy and wait for the opportunity,” not “wait for the opportunity to buy.”
We often hear older people lamenting, “If only I had invested in that stock 30 years ago, I would be…” Perhaps the best time to invest was 20 or 30 years ago, but the second-best time is now. Act as soon as you have the funds, lest you have the same regrets in a few decades. Life is short; how many decades can we afford to waste? How long can we allow ourselves to squander precious time?
Buying anytime sounds simple, but it’s also very difficult. Try it yourself. If you can do it, you possess the basic qualities for investment success. As long as you adhere to the principles of long-term holding and diversified timing, you can buy stocks anytime.
When to Sell - Don’t Sell
Before investing, prepare to hold for 20 years, research carefully, and after buying, put it aside and forget about it.
A common investor dilemma is: “When should I sell?” Some experts say, “Choosing the right entry point is hard, choosing the right exit point is even harder.” Investment guru Philip Fisher famously advised, “If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.” Warren Buffett, who became the richest man in America in 1982 through stock investments, exemplifies this. He holds stocks for an average of 4.5 years. So, my advice on when to sell is: “Don’t sell.” Hold long-term and minimize trading.
Long-term holding avoids frequent trading costs that erode returns. My research shows that with high-return investments like stocks, the longer the holding period, the lower the risk of loss. For example, with sufficient diversification, investing in the Taiwan stock market has never resulted in returns lower than bank interest rates for holding periods exceeding 11 years. This demonstrates that “diversify and hold long-term,” while seemingly simple, is an optimal investment strategy.
What’s so hard about not selling? It seems easy enough. But this is the most challenging of all investment rules and the most crucial factor for investment success. The difficulty lies in remaining unwavering, regardless of price fluctuations. This requires achieving the highest realm of financial management: “Own the stock, but not the stock price.”
The typical investor’s habit is to ignore a stock after buying it if the price falls, allowing it to continue declining and becoming a long-term loss. Conversely, if the price rises, they happily calculate their profits and readily sell after a 5% to 20% gain. Thus, “long-term investing” becomes synonymous with being trapped at a high price. There’s nothing remarkable about holding a losing stock long-term. The real key to investment success is remaining steadfast even when you’re profiting.
Jesse Livermore, author of Reminiscences of a Stock Operator, wrote: “I’ve been in Wall Street for many years, made fortunes, and lost them. My fortune-making has never depended on my forecasting ability but on my ability to hold positions firmly, unfazed by market fluctuations. You might find many people in the stock market who are incredibly accurate at predicting entry and exit points, yet they don’t make much money. It’s rare to find someone who can remain unmoved during a sustained market rally, and I’ve found this to be the hardest thing to learn in stock investing. Only by mastering this essence can investors make a fortune.”
Endure the Falls, Wait Out the Rises
Traditional thinking dictates: Buy low, sell high. However, a new perspective redefines investing as: selecting appropriate investment targets and holding them long-term. Successful investing requires mastering the eight-character mantra: “Endure the falls, wait out the rises.” Never be disheartened by price drops or tempted to sell at the first sign of a rally. Maintain a long-term perspective.
Why do most fortunes come from real estate, while fewer are made from stocks? The key is visibility. Real estate prices are largely invisible, while stock prices are constantly displayed. Real estate investors often achieve the “don’t sell” mentality, while stock investors, influenced by price fluctuations, rarely do. If stock investors could embrace the “buy and hold” approach, stock investing would be as powerful as real estate.
In the past 20 years, Cathay Life Insurance has consistently been among the top-performing listed companies in Taiwan. What’s their secret? They own real estate and stocks, and they buy and hold. This is their business philosophy, and it also applies to personal finance.
Look at the success stories of investors like Lien Chan, Tsai Wan-lin, and Wang Yung-ching. They all adhered to the principle of “don’t sell.” Tsai Wan-lin’s success stemmed from treating stocks like real estate. The Lien family’s success in stocks and real estate comes from their ability to hold long-term and remain unmoved.
The more complex the market fluctuations, the simpler the investment method.
Random Walk and Efficient Market Hypothesis#
I must emphasize that “buy randomly, buy anytime, don’t sell” isn’t just a catchy phrase; it has a theoretical basis. In the 1950s, the American financial and investment community developed a prominent theory: the Random Walk Hypothesis.
Random Selection is the Best Strategy
It’s generally agreed that stock prices, like other commodities, fluctuate unpredictably. The Random Walk Hypothesis states that stock price movements are so complex that they resemble random changes, nearly impossible to predict. This hypothesis highlights the unpredictable nature of stock prices and, more importantly, leads to a simple yet crucial investment method: the Buy-and-Hold strategy, which is essentially “buy randomly, buy anytime, don’t sell.”
The Buy-and-Hold strategy means investing available funds immediately upon availability (rather than predicting market upswings), holding those investments long-term without selling (locking them away and ignoring short-term fluctuations), and selling only when funds are needed (not in anticipation of market downturns). In short, the Buy-and-Hold strategy advocates investing consistently, holding long-term, and selling only when necessary, without trying to time the market. If stock price movements follow the Random Walk Hypothesis, the best investment strategy is random selection and long-term holding – the very essence of “buy randomly, buy anytime, don’t sell.”
Another implication of “buy randomly, buy anytime, don’t sell” is that analysis and prediction are futile. The Efficient Market Hypothesis states that in an efficient market, all information that could affect stock prices is quickly and fully reflected in those prices. By the time you receive information from analysis reports or publications, it’s already outdated and incorporated into the price. In other words, in an efficient market, stock prices are always in equilibrium, and no investor can consistently beat the market by collecting and analyzing information to gain excess returns.
In-depth Analysis is a Waste of Time
The Efficient Market Hypothesis, introduced by renowned financial expert Eugene Fama in the 1970s, emphasizes that you don’t need to be an analyst or expert to build wealth through investing. Painstakingly researching and analyzing stocks is a waste of time because most useful information is already reflected in the price. Studying this information offers no advantage. It’s better to invest your money and hold long-term.
The Efficient Market Hypothesis teaches us: Ignore the noise. Don’t waste time, effort, and money gathering information, as it’s mostly already priced in and thus worthless. There’s no need to learn complex analysis methods because most are ineffective.
By adopting the strategy advocated in this book – diversification, buying randomly, buying anytime, and not selling – you can achieve excellent returns.
1. Short-term stock price movements are random, making it impossible to predict when prices will rise or fall.
2. Although short-term stock prices are unpredictable, the long-term trend is upward due to continuous economic growth. Buying and holding stocks long-term, with the compounding effect offsetting risks over time, yields considerable average returns.
3. Almost all publicly available information is already reflected in stock prices, making it unhelpful for investors.
4. Most analytical methods used by investors are already factored into stock prices. Using commonly employed analysis techniques will not generate excess returns, meaning you won’t outperform the buy-and-hold strategy in the long run.
For years, facing the ever-changing investment world, I’ve sought a method that transcends the “busyness and blindness” of financial management. “Buy randomly, buy anytime, don’t sell” is the principle of simplifying complex problems.