On the Importance of Long Term Thinking

Posted on Posted in General Thoughts, Investment Philosophy, Investment Quotes

One of the things I’ve been thinking about over the past few days is how important it is as an investor to engage in patient, long-term thinking. Most of us are either individual investors managing our own portfolios or maybe small professional managers like myself with a few like minded partners/investors. The edge we have over larger and better equipped institutions cannot be understated. Our edge lies in our ability to be able to think, and more importantly act, with a long term time horizon.

How long is long-term? 3-5 years minimum. I just got done reading a bunch of articles on Allan Mecham, who feels 10 years is an ideal timeframe. Buffett of course has a favorite holding period of “forever”. But even if you are more of a deep value numbers guy like myself, 3-5 years is an adequate time amount of time to be able to extract an edge over more our more frenetic institutional money manager friends.

Institutional managers are burdened by investment committees and impatient, demanding investors, most of whom focus on quarterly, or even monthly results. This forces investment managers to make decisions that inherently sacrifice long term ultimate results in favor of attempting to outperform over the next 30, 60, or 90 days. This objective of course requires different strategies and mindsets-ones that are not conducive to long term sustainable results.

Stocks are nearly always priced above or below their intrinsic value. Contrary to the Efficient Market Hypothesis, stocks hardly ever are priced exactly what they’re worth. Allan Mecham pointed out that the average stock fluctuates 80% each year between its 52 week high and low prices… think about that-is the average intrinsic business value of companies across America really fluctuating by that much each year? Of course not. Ben Graham said:

“In the short run the market is a voting machine. In the long run the market is a weighing machine.”

This is one of the simplest ways to think about investing. Some investors call this “time arbitrage”. By simply buying what’s undervalued and waiting patiently, the market eventually will offer you a chance to sell your merchandise for fair value. Joel Greenblatt, who has one of the greatest track records in history, one said: “I can promise you that if you do good valuation work, the market will reward you. I just can’t promise you when.” Along those same lines, Buffett said:

“We focus on the ‘what’, and we don’t worry about the ‘when’.” 

Why Long Term Thinking Works, and Why it’s Our Best Edge

I’m adamant and completely convinced that most investors could significantly improve their results and even outperform the indexes and most professionals if they could only understand the power of patient, long term investment strategies that are founded in value. The vast majority of individual investors sell at the wrong times (during panics) and buy at the wrong times (after the market has already advanced significantly). This cycle repeats itself over and over. And therein lies our edge. Here at Base Hit Investing, we like to say that our main edge is understanding that:

“The market systematically and consistently overvalues stocks with great recent results and outlooks. Conversely, the market undervalues companies with poor outlooks and weak recent results.”

This concept works because markets are made up of human participants, who all have emotions and the habit of acting irrationally. They buy and sell based on emotions or herd mentality, and this creates opportunities for clear thinking patient investors. There has been all kinds of research and empirical observations that have backed up that basic concept, and that concept is our we as clear thinking value investors can protect capital, manage risk, and produce superior long term investment results.

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