There is a reason why I prefer to invest in stock market relationships that could last a lifetime. To me, “long term” is holding a share for three to ten years and beyond, and in this post I will explain why it make sense.
My interest in this type of investment sparked in 2008 after I read the Intelligent Investor. I learnt that owning a stock is just like owning your own business, but with one key difference: you can actually choose the opportunities with the best economics. I wish I had read that book twenty years earlier!
And it got better — I also discovered that you can buy fractional ownership of these businesses at bargain prices when others felt forced to panic and sell. A good commercial outcome for the businesses you are invested in provides a good share price increase if you take the long-term view.
The Long Term View
The stock market is a fascinating group think experiment. It makes rational people do all kinds of irrational things. Understanding the psychology of the market allows it to be your provider, not your master.
Buying shares of companies on the stock market is a very quick and painless way to gain ownership. It is also a quick and easy way to sell ownership. Just because we can buy in and out of a company hundreds of times per day it doesn’t mean we should. The market gives opportunities to buy shares in companies cheaply, but also provides distractions as price rises and falls are always there blinking at you. As long term investors we can use this market dynamic to our advantage.
Attempting to predict the short-term behaviour of a stock price is a difficult game to play. Hype, unrelated events, and temporary shocks can all affect share prices — yet most money-managers still play this short-term game in order to meet their clients’ expectations for quick growth, as well as their own bonus targets. Usually, this leads to higher fees and lower returns.
Despite it being in many ways easier — not least due to the need for fewer trades — few investors choose to play the long-term game. However, with research, we can make a strong estimate as to what the future will look like for certain industries. If long-term investment is the goal, the “if” is more important than the “when”.
For example, China is currently in the news due to its slowing growth and problems moving to a fully capitalist system. Short term, it is very hard to see what will happen with the market there, but we could mostly agree that in ten years time they will be using far more steel than they do today, and demonstrating a strong commercial ability. By taking the longer term view we have more time to research the individual corporations, and apply an investment thesis based on commercial potential. In a way we have the luxury to take the longer term view in comparison with the money managers driven by shorter term results.
From a 34% Loss to Nearly 3 Times Your Money
Take a look at the chart below of one of my favourite companies, Berkshire Hathaway. If you had bought Berkshire in March 1999 then you would have watched the value shrink by 34% by February 2000. At that point the feeling of loss would be powerful, urging you to sell before losses compounded.
The shareholders that understood than Berkshire Hathaway was a powerhouse (run by arguably the most successful investor ever) in fact remained calm during that period. Their reward came in the longer term, with a 2.7 times gain up to September 2015. In fact, it didn’t matter if you bought Berkshire Hathaway in March 1999 or February 2000 — over the long term, the returns were still excellent.
Things work out in the long term
Patience pays off. Long-term investing works for many reasons, and perhaps the most important is that very few investors are able to really commit for the long term because of lack of commercial research, the quest for quick wins, situational constraints or misinformation.
By taking ownership in the right companies with a long-term view, it is possible to play to win because the undying value of the business will be reflected on the market at some point. We just don’t know exactly when. If we can pick the next Berkshire and just hold on we’ll do well as investors. Luckily, there are some ways to identify great companies and buy into them when they are trading at less than they are worth.
Disclaimer: The above does not constitute investment advice. The author has invested in the companies mentioned at the time of writing.
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