One of my senior colleagues in my last corporate stint would say “Understand which animal you are. If you are a cat, you can at most become a smart cat or a brave cat. You cannot become a tiger”
Very few investors hold stocks for a period of 10 years, most of them tend to sell out once a stock under performs the market for a couple of years. Though most investors state that they intend to hold stocks for the long term, their actions tell a different story. Not surprising at all. We all know that waking up at 5 AM and meditating is good for us, but how many of us actually do it?
Investor behavior has a bearing on investment outcomes too, it is not just about how good your stock picks are or about how great your investing philosophy is.
If you cannot stay the course, you will rarely get around to experiencing the benefits of a so called “coffee can portfolio”
A more practical way of viewing investment opportunities is to ask yourself if the investment can deliver healthy returns over the next 3-5 years. Justifying a valuation of 90+ PE for a high-quality business when your investment horizon is 3-5 years calls for some serious introspection, business analysis and financial engineering. Unless you have bankable insights into why/how earnings can spike over this time horizon, it is not easy to make that investment if you are numerate.
Why would one want to get invested assuming a long-term horizon when your own historical behavior contradicts the very assumption? Given a choice, always play the higher odds.
It is not that long-term investing does not work; it is that very few investors can hold stocks over such long periods in the face of interim volatility.
Come 2021, I will be hitting the 10-year holding period for 4 of my stock holdings, in doing so I am already an outlier. I have the track record and the moral right to talk about long term investing. That said, my investment horizon when I first evaluate an opportunity is 3-5 years; never 10 years. A 10-year holding period is something that one should gravitate towards over time, it is not something that one should start with as a romantic ideal.
Why does most of the public media discourse center around long term investing?
Because it makes for a good sales pitch and it is in line with the investing narrative of our times. Our idols are investors like Warren Buffet, not the traders who have a more impressive track record than the man himself.
If it feels good to listen to, it must be the right way of doing things; our human nature is prone to playing some nasty tricks on us.
The market only rewards you for an approach that you can reliably and consistently execute well enough over a considerable period of time. You can execute something consistently only if that approach is in line with who you are and with your world view.
There is no holy grail in investing. There are multiple ways to succeed, some will be easier to execute than the others are for you. There is limited benefit in trying to force fit yourself to a method you are not temperamentally suited for.
Any other answer is a sales pitch that is designed to lower your guard with a narrative that sounds right and to extract resources from you.
There are hardly 30 businesses in India that you can buy and hold for 10 years, provided you buy them at a reasonable price. For the other businesses, there is no harm in taking a more active approach.
In one of the mid management training modules at my previous employer, the trainer told us about the time the organization was expanding across other developing countries across the world. Two promising young managers were posted to locations outside India to sort out the regulatory challenges the organization was facing in running operations in those countries. Both the countries had regulatory bodies that weren’t welcoming of outsider organizations domiciled in developing nations.
The story goes that in 18 months’ time, one of the two managers came back on a stretcher while the other one had the time of his life. The first gentleman got so stressed out that his health got messed up while the second gentleman managed to learn how to cook local cuisines, travelled across the entire continent and even signed up for dancing lessons while he was posted there.
Before we get judgmental about the first gentleman, the real problem was that he was a fish who was asked to climb a tree. In a few years’ time the same person in a different responsibility turned out to be much more successful at it than the second gentleman did.
Which animal we are deep within has a bearing on what we are good at and what we enjoy doing. For some reason we idolize certain professions/methods and put them on a pedestal, thereby forcing those who aren’t temperamentally suited for them into force fitting themselves in those moulds.
One may get more respect as a lion but there isn’t much harm in being the friendly neighborhood dog that everyone loves to play with.
