Before making on start on this next article, I would advise going back and making sure you’ve digested part one of this series if you haven’t already. Part one lays the essential foundations of the series and can be accessed via the following link:
Thinking like a long-term investor: Part 1 of 2
Human nature being what it is, many of us feel compelled to constant activity, a trait that is ingrained by the constant distractions of modern life. We are so conditioned to remain industrious and busy, to constantly be “engaged”, but this behaviour can be seriously counterproductive when it comes to investing and in truth, our long-term performance may be better served by restraint. Imagine if we could restrict ourselves from the incessant urge to trade, if instead, we were to adopt a posture of calm and deliberation. In my experience, the principle of ‘less is more’ holds true. When the urge to trade becomes overwhelming, I try to step away from my computer and do something else for a little while. My guiding principle is to eschew trading decisions during market hours; instead, I reserve such decisions for moments of tranquillity, outside market hours, where I can reflect with greater objectivity. This discipline not only curbs potentially impulsive trading decisions but also aligns with the more composed investment approach which I seek to cultivate.
The Psychological Weight of Ego
The influence of psychology on our investment decisions is profound. Our innate desire to outperform the market and validate our judgments often leads to over-trading – a purely ego-driven impulse that manifests as impatience with positions that fail to show immediate returns and a compulsion to sell prematurely. Unfortunately, the market doesn’t really care about our egos and has a way of teaching humility in a fairly unrelenting manner to those not willing to master their psychology.Every trade we make is a negotiation with an unknown counterpart who may well possess superior insight. When you want to buy a new holding, some other investor must be willing to sell theirs to facilitate your investment. Thus, a prudent investor might reflect, “If this stock is truly a gem, why are others so eager to divest it?” Understanding and mitigating the ego’s influence can enhance our investment discipline and decision-making.
Routine as a Shield Against Missteps
To safeguard against the pitfalls of impulsive trading, I find a regimented routine can be helpful. Each morning, I review RNS announcements, immersing myself in research on companies outside my current holdings. This practice ensures that I remain informed of opportunities without succumbing to undue concern over existing investments.Additionally, I’ve begun paying more attention to technical analysis, working to improve my buy and sell timing once I have conducted my initial research. By focusing on these analytical tools, I avoid hasty decisions driven by transient market movements. A well-defined routine thus serves as a safeguard against unnecessary trading and emotional reactions.
The Merits of Dividend Reinvestment
The value of dividends cannot be overstated. While some investors may dismiss dividends as inconsequential, they represent a tangible benefit that enhances portfolio returns. Reinvesting dividends can significantly accelerate the compounding process, yielding substantial gains over time. Moreover, dividends reflect a company’s commitment to shareholder returns and financial prudence. A company that consistently pays dividends is likely demonstrating underlying strength and stability. Conversely, an absence of dividends may signal a lack of such attributes. Hence, dividend payments are not merely an additional source of return but an indicator of a company’s quality and financial health.
The Wisdom of Segregated Strategies
The intersection of long-term investing and short-term trading presents a number of challenges. While some seasoned investors may adeptly manage both strategies, for the novice, I found that I needed to initially focus on just one discipline. The psychological demands of each approach differ markedly and blending them can lead to conflicting habits and diminished effectiveness. Therefore, for those embarking on their investing journey, a concentrated focus on long-term investing is prudent.
The Imperative of Valuation Understanding
An acute awareness of valuation is paramount in long-term investing. Recognizing the disparity between a stock’s intrinsic value and its market price is essential. By identifying significant undervaluation and maintaining patience, an investor can reap considerable rewards as the market eventually acknowledges a stock’s true worth. This approach underscores the importance of understanding value relative to price and remaining steadfast in the face of market fluctuations.In conclusion, these reflections on long-term investing underscore the importance of patience, discipline, and a clear understanding of value. As you navigate the investment landscape, embracing these principles can yield enduring success. In my opinion adopting a long-term perspective from the outset will likely foster greater success and stability for those new to investing and provide a much less stressful introduction to the markets than a trading-type approach.