We are all long-term investors until...
Everyone has a plan until they get punched in the face.
Having, and sticking to, a true long-term perspective is the closest you can come to possessing an investing superpower.
— Cliff Asness
Everyone has a plan until they get punched in the face.
— Mike Tyson
If you want to have a durable investment edge, you have to maintain a long time horizon. This is easy to do when markets are tranquil and rising, but can be far more difficult when the news is at its worst. When things are bad, we tend to shorten our time horizons.
Normally, when the economy and stock market are doing well, investors are willing to pay a high price for future earnings. They might be willing to pay a lot for a company that has no current income, on the assumption that in a few years the profits will start rolling in. In this scenario, comfortable in their long-term assessment of the company, it’s easy for them to ignore short-term bad news.
But when things don’t look great, investor time horizons compress. The survival instinct kicks in. All of a sudden we become unusually concerned with what will happen this quarter, this month, or even this week. We hang on every word management utters in a conference call. We extrapolate bad news reported by a competitor to the entire industry. And we scour the news for reasons to sell.
As you can imagine, this is a time when prices become volatile, and when most investors overreact to bad news. We suddenly forget that the vast majority of a company’s value comes from earnings that will come well into the future, long after the current troubles are forgotten.
The successful investor must maintain this long time horizon. Times when everyone else has extreme myopia offer the greatest rewards to farsighted investors who remember that all periods of trouble eventually pass.
And yet so many investors, especially those new to having significant assets in the stock market, feel like they need to anticipate the next market correction, take profits off the table, and go to cash. This is almost always a horrible idea. In the oft-quoted words of legendary fund manager Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
An investor with an entrepreneurial background should be uniquely positioned to maintain this understanding. You have learned over the years to take advantage of opportunities—using downturns to buy distressed assets out of receivership, acquire weaker competitors, or secure prime retail locations vacated by tenants. Having a long-term view is the way to emerge from downturns stronger than ever.
You wouldn’t be where you are today if you listened to the Chicken Littles or panicked every time the economic outlook appeared grim. Take this essential element of success and apply it to your investment portfolio as well.
This is your only edge over the pros. Honour it.
The post-Olympic crash
This earlier days of this blog spent some time covering the struggles of post-exit entrepreneurs. One of these post covered what I call “The Crash.”
This week the FT reported on a study which showed that “about 35 per cent of elite athletes suffer from some form of mental disorder — from burnout and substance abuse to depression — with the period following major tournaments.”
What does this have to do with investing? Surprisingly, quite a bit. Many people only seriously begin investing after a great wealth-creation event, like the sale of a business. This can feel like reaching the “pinnacle” of the business world, akin to winning that Olympic gold. A post-sale entrepreneur can learn a lot from the struggles of the post-medal athlete.
It can be treacherous, but with the right approach and mindset, tremendously rewarding. This is why I wrote Low Risk Rules.
Cathie’s ARK again
I’ve beat up on ARKK once or twice already.
This week, Barron’s took another turn, highlighting a Morningstar study:
…since its 2014 inception, the fund has returned 9.7% on average per year, according to Morningstar. That’s far below the triple-digit returns that investors once dreamed of, but more or less in line with long-term stock returns.
And for investors, it’s even more bleak: Their average annual return, calculated by Morningstar is -17%.
It’s a story that is almost identical to the story of the CGM Focus Fund that I told in Low Risk Rules.
And for those wondering why chasing growth can be so challenging, I would refer you to the article “Why investing in the ‘next big thing’ is so hard.”
I feel like it would be very timely to revisit this as investors chase the now-consensus AI boom in stocks like Nvidia. As treacherous as today’s market appears on the surface, value is out there for those looking for it.