On a Long-Term Investment Strategy in a Stock Market

Against the backdrop of increasingly fierce industrial competition nowadays, firms tend to have substantive business risk and/or information risk, increasing the estimation risk and limit of arbitrage for investors in their short-term investments in a stock market. It is thus important for investors to hold a long-term horizon for at least part of their investments in the stock market. This chapter aims to introduce a long-term investment strategy that is practically feasible and potentially profitable for investors. To this end, we first develop a parsimonious model in which we identify the major determinants of a firm’s value and long-term growth. This model is used to select high-value firms from each industry for further fundamental analysis and valuation. We next expatiate on how to perform strategy analysis, accounting analysis, financial analysis, and prospective analysis and therein apply the residual operating income valuation model, in the best possible manner, to further value the selected firms and their long-term investment potential. Lastly, we expound the strategy of forming and adjusting a long-term investment portfolio in a way that potentially maximizes long-term portfolio return.