The Value of Being a Long-Term Investor

One of the most common statements I hear from fellow investors is the idea that they are ‘long-term’ investors and that short-term price fluctuations do not concern them. In today’s blog, I want to unpack the idea of what it means to be a long-term investor and consider some of the challenges and benefits that come with giving yourself that label. First, however, let’s try and define what we mean by a ‘long-term investor’.

In my opinion, a long-term investor is one that makes an investment with a view to holding it for several years – the exact figure is down to your discretion, but I would suggest that a period of no less than five years is generally considered to be ‘long-term’ by most investment professionals. A five-year period is sufficient time for a company to develop and launch a new product or service, to construct new facilities, and for an investor to make a reasonable assessment of the performance trend of the company.

Contrast this, however, with the statistic that the average holding period for holding shares is less than half of that – it is, in fact, less than a single year. Yes, that’s right, UK shareholders are holding investments for less than a year on average before divesting. Whilst I have no doubt that the increasing ease of accessing the market has pulled this figure down, it also makes me consider the obvious conflict with the huge number of investors I meet that talk about being long-term investors. Could this be a sign of ‘Shy Trader Syndrome’?

Shy Trader Syndrome

Shy Trader Syndrome is a phrase I coined to reflect that idea that ‘Traders’ are often considered little more than professional gamblers and that this view causes them to present themselves to others as ‘long-term investors’. When you think of traders, you often think of young, white, cocky males, yahooing on a trading floor and placing quick-fire, high-risk trades on speculative investments. People think about The Wolf of Wall Street, Nick Leeson and Gordon Gekko. They think about the oft-touted statistic than over 90% of day-traders lose money. They think of these things and decide that they don’t stack up with their own carefully curated image as a prudent and shrewd financial genius and instead decide to present themselves as a sophisticated and long-term investor.

By comparison, the language around investors tends to be more positive. Investors are ‘stewards’ of capital with a patient, long-term view on high-quality businesses that will achieve success over many years. They support the leading names in a sector and back the growth and performance of highly durable, proven winners.

To anyone with a bit of self-respect, the choice seems simply. Would you rather be viewed as an investing cowboy that causes untold wealth destruction or as a patient and wise player of the investment markets?

Of course, anyone that classifies themselves as a trader is probably rather riled up by now – and I will caveat the above comparison by saying that not all traders are financially unsophisticated cavemen with an appalling track record of losses. Just the same as not all ‘long-term investors’ are wise Buddha-like figures with outstanding compound annual growth rates.

I know a handful of extremely skilled traders who would absolutely scoff at my paltry 11% annual CAGR – to them, 10% is a pedestrian ‘bad year’. So why I do I classify myself as a long-term investor and not a trader?

The Benefit of being a Long-Term Investor

The end of 2021 and the beginning of 2022 have seen a macro-economic environment that most young investors have never been in before. Inflation, widely considered to be an economic relic, has returned with a vengeance, and central banks have begun hiking interest rates in response. As a result, many investors are now starting to realise that markets do not always move ‘up and to the right’ – not only in theory but also in reality.

Low-income consumers are facing extraordinary headwinds as fuel and energy bills skyrocket, food inflation hits their wallet, and home prices continue their rapid increases. As a result of these challenges, consumers are showing increasing signs of financial stress and are cutting back on luxuries such as eating out, travel and vacation costs.

For most of the last ten years, central banks around the world have been an investor’s best friend, with extremely loose monetary policies and low interest rates. They have funded a period of easy growth for companies – money has been cheap, so companies have been able to borrow vast amounts to fund share buy-backs and invest in growth initiatives. Unfortunately, all of that is changing. Interest rate hikes are tearing through the economy and global stock markets, increasing volatility, and slamming the brakes on the investment performance of high-growth, non-profitable businesses.

For investors that have had year after year of positive returns, what started as a vague sense of unease is probably starting to blossom into a growing sense of panic as high-multiple growth stocks collapse, bonds begin to enter a bear market, and badly constructed portfolios begin to hand their returns back to the market.

For a long-termiInvestor like me, however, I am less concerned about the immediate future and more concerned about the long-term potential of the companies I have invested in. By focussing on strong businesses, I am able to tune out some of the short-term noise and give the economy time to settle down; an outcome which I am fairly certain will eventually occur.

The companies I try to invest in are companies that, by and large, are not entirely reliant on a single economic indicator to succeed. For example, if a company can only grow by borrowing huge amounts of money because they generate little revenue, then rising interest rates make it more difficult and expensive to borrow that money. In addition, their existing debt becomes more expensive to service, and they have to pull back on investing in the business, reducing their growth rate and by extension, the rating the market will give the company.

Giving companies time to succeed is critical to my style of investing. In the short-term, I can’t really predict growth rates or profit margins for individual companies. By carrying out technical analysis, I may be able to see patterns but to me, this isn’t so much ‘investing’ in businesses as much as betting on price movements. I have no doubt some people succeed at it, but some people are also good currency speculators, make money on the horses and play the lottery – none of which appeal to me as a source of sustainable wealth generation.

Lean into your Personality

Most of my friends will tell you that I am, by nature, a pretty optimistic and relaxed person. A stickler for detail and quality but not at the expense of taking my time and enjoying life. Indeed, I’m writing this blog with the windows open, a fresh cup of coffee and a general sense of enjoyment. I’m writing what I want to, when I want to, and because I want to – not because I feel I have to.

I like to have a well-considered plan before acting; I can think fast and often do, but I do like to have at least the outline of a long-term path I’m following. One of the reasons I’m able to react quickly and effectively when managing my portfolio is because I have spent lots of time thinking about risk management, position sizing, diversification, macro-economic indicators and have a well-curated watch-list of companies that I’m looking to add to the portfolio – sometimes that I’ve been watching for years.

I relish having the freedom to invest the way that I want without needing to constantly be worrying about quarterly targets. Working in business development and marketing, I am always under professional pressure to deliver revenue growth and high-performance metrics. One of the reasons I am so good at this is my insistence on pursuing a suite of tactics that work together to achieve my overall goals. Some of these tactics will perform in the short-term, others take over a year before any tangible successes can be seen.

My approach to investing is similar. Some of my investments are plays on current market conditions that are expected to start performing almost instantly. Others are much longer-term investments that play on societal trends I see playing out over the next decade. With the performance of the latter, I am not concerned if performance over a single year is poor – instead, I recognise that growing a business takes years, not months.

By being a long-term investor, I give myself and my investments the time to succeed. I can be patient and careful in my actions and can make gradual improvements in my performance. I have been an investor for about ten years and over time have improved my Compound Annual Growth Rate (CAGR) by about percent. This might not sound like much, but if I can improve by five percent each decade, this will lead to significant market outperformance over my lifetime.

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