Long ago, ‘long term’ meant investing for more than 10 years and up to eternity. Today, for a large majority, it means anything between six and eight months. One of the reasons for this view is that the future of the asset underlying a share, the company, has become uncertain. Earlier, business cycles would last 50-60 years, but due to technological advances these cycles have shrunk. These have made the markets highly volatile, making it difficult to hold on to a stock.
But long-term investing hasn’t become part of a Jurassic Age. Finally, markets will be driven by corporate fundamentals. If you find a company with a strong balance sheet and consistent earnings, the short-term fluctuations won’t affect the long-term value of the company. In fact, periods of volatility could be a great time to buy if you believe a company is intrinsically strong. The only problem is that the fundamentals are being marred by an environment that’s become unreliable.
Long term has become an anachronism. The capital markets are part of a larger organism–the economy. They flourish when the economy flourishes, when businesses in the economy flourish. To stay in business, you must generate money in excess of your cost of capital. That’s impossible in the short term.
The rapid technological advances of our time threaten businesses with rapid obsolescence. Moore’s Law (which holds that computer processing speeds will double approximately every 18 months) has proven remarkably accurate to date, and will hold good another 30 years. Robotics is also making strides, which points to an increasing miniaturisation of products and automation of processes over time. In other words, businesses just don’t have the time to recover their cost of capital.
If you invest in a good business that is growing steadily, your capital will not only appreciate, you will get a good dividend as well. But only time will give it to you, so you need to ask yourself if you have the kind of patience to sit tight long enough to reap the rewards. Also, if you are investing for the long term, you should be careful to invest only in well-managed businesses.
Long-term investing is about finding the gap between value and price. Value is what you get, price is what you pay. So you have to invest where the gap is maximum–when the gap closes in you must think of what to do. True investors should look at what they will get from the business.
But there’s no guarantee. If the stock no longer fits the purpose that you had bought it for, then you should book losses and sell out. You can also sell out when you get a better investment idea. When you invest for the long term, there are very few good companies, though there’s always a shareholder.
If you do not find a great stock idea, there’s no harm in sitting on cash. For successful long-term investing, you need to avoid the big mistakes. Otherwise you get caught up in the stock mania that happened two years ago, where everybody was trying to make money and outsmart the other, but everybody forgot that the underlying stock prices were far out of sync with the fundamentals.
The most money is made when you buy at the right price.
In the past, ‘long term’ meant three to five years, or longer, and everybody was happy to take that kind of view–even institutional investors. But in the volatile markets of the day, investors are looking at shorter time horizons and the ‘long term’ is more like one to three years.
Often you buy and take a position that you are going to hold for three years. Now, if the company continues to perform, you may hold it for 10 years. But if something changes for the worse, you’ll have to review that position. When you invest for the long term, it’s a lot to do with monitoring.
In India, if you had really played by the long-term rules on the broad market, you may not have made any money in the past decade, as the Sensex is nearly at the same level as it was 10 years ago. However, had you invested somewhere in 1998, you may have made money, while if you had invested somewhere in 2000, then you must have lost money.