In today’s article, I want to expand on what I mean when I say that I’m a long-term investor and give some tips and tricks I find helpful for both cultivating and sticking to, this mindset. In my experience, less “trading” activity and longer holding periods have generally led to superior results, with my largest individual returns coming from investments I’ve held for multiple years rather than months or weeks. For example, investments I have held over five years have generated a CAGR of 11.5%, over three years 7.45%, one year 7.35%, and 16% for investments held for less than 12 months. This reflects my propensity to “lock in profits” if a company has sudden price movement within a year a purchase but the variance on returns is also greatest on my shortest holdings, running between -95% (Carillion) and 54% (a smallcap called Frenkel Topping), indicating that my success rate over the short-term is also the most variable.
Being a long-term investor in high-quality companies and holding them for long periods of time is, in theory, relatively easy to do, as well as being fairly lucrative if done well. I can screen for companies with low debt, high return on capital employed, growing revenue and profits, invest in a selection and then simply do nothing. In reality, however, I am often be presented with the scenario that I faced earlier this month when one of my biggest holdings, Team Internet Group, published an update which sent the shares down 8% on the day, and 34% over the month. As soon as I published my morning overview of the update, I was immediately presented with the news that the shares were down, and the view that I was therefore wrong to be holding as the company clearly isn’t up to scratch.
Despite this, my initial instinct has not to run for the hills, but simply to sit tight and perhaps top up once the price movement has levelled out. My reasoning behind this is that:
1) I know the company well, it has performed strongly over the last four years and the latest trading update, although underwhelming, was hardly a car crash, with the business still growing revenues and profits, just at a slower pace than desired by the market.
2) If I sell my position in full, where do I deploy the capital? I haven’t got another company that I desperate want to invest in that I need the cash for. Making too many of these “capital reallocation” decisions increases my risk of me making the wrong decision – it’s easier to get 12 decisions a year right than 120.
3) One of my biggest mistakes in the past has been to letting loss-making investments run whilst cutting winners too early. Since I initially invested in 2021 at 83p, the shares having climbed 60%, excluding dividends, to 133p. The free cashflow yield has more than doubled from 5% to 12%, the return on capital employed has grown from 4% to 35%, and the operating margin has grown from -0.9% to over 5%. This is a flourishing business that is getting stronger over time – even if the latest update is not quite as strong as the market might like.
Keeping a long-term focus
From the earliest days of building my portfolio, I wanted to be a long-term investor rather than a trader. By this, I mean that I wanted to own companies for many years and so I select my investments with this in mind. If I had inherited a family business, I wouldn’t look to sell it as soon as it had a bad quarter, or even a bad year – instead, I would probably do almost anything to keep my stake in it and would want it to thrive. This long-term focus is at the absolute core of my investment philosophy and so I am constantly wary of suddenly starting to act like a trader and start chopping and changing things every other month.
One strategy I use to keep this goal clear in my mind is to set long-term targets for my portfolio, rather than annual or quarterly goals. For example, one of my long-term goals is to rebalance my portfolio to reduce my UK exposure – I set this goal about three years ago and am about 80% of my way towards achieving my target allocation. Another long-term goal I have is my compound annual growth target of 10-15% – unlike my rebalancing target, this is something which I would expect to achieve and sustain over many decades, rather than within a few years.
My approach to diversification is another strategy which supports my long-term thinking as an investor. Despite Team Internet Group being one of my largest positions, it still only accounts for 5% of my portfolio (or a little less after the recent price decline). As a result, the “damage” caused by a paper drop of is only a little over 1% of the total value of my portfolio – hardly something to run around screaming about. I regularly write about the importance of diversification but this really highlights how essential it truly is to protecting your psychology and emotional detachment as an investor. If I had weighed Team Internet Group more substantially within my portfolio, to say 10% or 15%, the damage would have been more substantial and made it more difficult to resist “doing something” on the day. In a world where I have seen private investors weighting as much as 30% to a single holding, I cannot imagine the worry it would cause me if the position went wrong.
The idea of position sizing is intrinsically linked to this – for example, I have a rule that no individual equity position can grow larger than 8% of my total portfolio value, perhaps 10% at a push, but by that stage I would be actively looking to diversify away from it. Such a large holding would have to be well-researched and very low risk (certainly nothing as racy as a small-cap like Team Internet Group) and I also take an active approach to managing “perceived risk”, where I try to minimise exposure to risks like political unrest in a country, even if nothing specific has happened to a particular company.
I’m also incredibly wary of what information I consume as a long-term investor – day-to-day, there are a huge volume of opinions, reports and trading updates published, and trying to absorb and react to all of them is likely to scare you out of good companies and stop you holding for the long-term. Team Internet Group is a great example of this, where within minutes of the update being published, I was being told by others that they had sold, and questioning why I wasn’t doing the same thing. Although I enjoy these conversations and find the juxtaposition to my own opinion to be useful – I work hard to synthesise many sources and form my own opinion, rather than reacting to the opinions held by others.
Most of my real investing decisions are made over evenings and weekends – usually time spend at logged into Sharepad, my investing platform of choice, and with a set of spreadsheets open to crunch numbers and consider different ideas.
Finally, I try to spend most of my time with like-minded investors that want to hold for the long-term and consider investing more akin to ownership of a business than an opportunity to chase a made-up TikTok lifestyle of leased Lamborghini’s and overpriced cocktails. The allure of a fictional social media lifestyle is entirely at odds with my own philosophy and approach, and spending time discussing my investing strategy with people that want to pursue such a fantasy is likely to lead to me developing bad habits that are incompatible with my desired approach. In truth, you could probably debate how truly “bad” a trading mindset is but I simply mean that the approach is in direct conflict with my own approach – I’m looking for investments that compound at 10-15% over many years, not opportunities to generate 10-15% in a few months. Such an investment may well do well in the short-term, and then fail to perform over the coming decade.
Maximising your potential to compound
Thinking in this way helps to keep my focussed on my long-term investor philosophy and avoiding snap decisions that cost me money in the long-run. This long-term philosophy also helps give my ideas time to play out, giving me maximum benefit from the time I spend researching ideas. I often find that after making an initial investment, it might suffer short-term price weakness, or perhaps move within a range for many months before starting to gain positive momentum in response to improvements in fundamental performance.
Thanks to the time I spend researching companies, I find it relatively easy to keep a patient, long-term view of share price movements. If you’re confident in your research methodology and believe you’ve found a company with strong fundamental performance and positive outlook, then it makes sense to sit back and let it “do it’s thing” over time. In addition, the individual selection of quality investments should mean that your portfolio as a whole is packed full of great companies, spread across a range of sectors and geographic areas, at different stages of their commercial lifecycle. This portfolio will be valued more in some months than others, but over time should increase in value as the performance of the underlying companies improves.
As a result, when I identify potential new investments, I tend to add them to my watchlist and take my time before adding them to my portfolio. By spending time watching the companies on my watch list, I build an understanding of their industry, strategy, and execution track record, meaning that if I take the decision to invest in them, I am far more confident and comfortable in giving the management team time to grow the business as a long-term investor.