There is only one way for individual investors to win – to increase our time horizons. I have written about this before here and here. Go have a read of these posts to understand why. The underlying reason is that most professional money managers have short term targets. If they don’t show good performance on a quarter by quarter basis, money leaves their funds and they no longer collect their juicy performance fees. That is why many ‘professional investors’ buy stocks that will do well for the next quarter but not necessarily ones that will do well over the next 12-24 month. That is why active management gets outperformed by simple index investing.
On the other hand, we individual investors don’t have this problem. We can invest with the long term in mind. We do not need to performance chase. We have no incentives to produce stellar returns over the next quarter. Our time horizons are much longer. We want to be comfortable in retirement, not comfortable tomorrow.
As a result of this, we individual investors benefit from time horizon arbitrage. We can buy into stocks that may not do well over the next quarter or two but will do well over the next year or two.
Let’s take my investment in BAT as an example. Most funds were selling the stock as the stock price had a firm downward trend. Professional investors didn’t want their performance to be dragged down over the short term. Remember, their incentives are skewed towards the short term and not the long term.
I on the other hand was buying BAT stock hand over fist over the past year. You can look at the my journey section of this website to see this. I knew that there was nothing wrong with the fundamentals of BAT. The underlying business was still strong. The short term picture was bad but longer term I knew it was a solid investment. It was a great opportunity to buy.
Looking at the BAT performance year to date , the stock is up 27%. It is one of the best performing stocks on the FTSE 100. By being patient and thinking long term, I have been handsomely rewarded.
BAT is not a one off example. Look at Sage as another example. I have been buying shares in the accountancy software firm over the past year. I felt too many investors were concentrating on the short term with this stock as well. They were too impatient for the value to play out. Looking at the sage share price perforce this year, it is up close to 15%. That is 15% in three month or 60% annualised.
You can go through the my journey section of this site to see more examples of how looking beyond the next quarter can be beneficial. Have a search of BP, Hikma or Shell on this site. Go see what price I bought them at and what the current price are. I was able to buy them cheap because the big money – the mutual funds – were afraid of the short term performance of these stocks. Short-term investors create opportunities for long-term investors.
Patience and a long term mindset are a key weapon in the individual investors arsenal. Yet too many of us don’t utilise it. Why is that? I think it is because too many of us want to get rich quick. We don’t want to wait a year or two to get the performance we crave. We want it today. This mindset needs to change. It is this shift in thinking that will allow us to get better returns.
Apart from wanting to get rich, they are a whole host of other reasons why we don’t invest for the long-term. They are:
- It is boring.
- We think we can time markets.
- Short-term losses are painful. We don’t want to see red ink on our brokerage statements even if it means we will do well over the long term.
- We think poor short-term outcomes means that something is wrong.
- There is always something / somebody performing better.
- We are distracted by noise and the financial press.
- It is tie easy to trade our portfolios. Doing nothing is hard.
- Short-term ‘investing’ can be exciting. You get the same dopamine hit as you get from gambling.
- We think that we know how markets will react to economic developments.We think we are more skilful than we are.
- We make decisions when we are emotional. All rationality is thrown out of the window.
I am sure we all hit a few of the above mentioned points. Let us learn from them. Let us become better long term investors. And the results will follow.
In every aspect of our life, we crave speed – whether it is fast fashion, fast food or listening to audiobooks on 2x speed. Unless you are a hedge fund specialising in high frequency trading and using the latest and fastest equipment, speed doesn’t work in investing. You need to invest with the intention of getting rich slowly. Investing in the stock market is not a get rich quick scam. Look at the secret dividend millionaires. The likes of Donald Othmer, Anne Scheiber and Phyllis Stone did not become millionaires overnight. So embraces patience. Have a long term mindset. Think like a business over. And the results should follow.