Almost everybody agrees with long term investing. It is a no brainer. What do you think?
If it is so obvious, how many of us are really long-term investors? How many “long term” investors have actually made decent money by being long-term investors?
1. What is long term investing
Thanks to our tax laws, a vast majority thinks long term means one year. Well, one year or less is “Short term”. However, according to purists, long term means 10 years or more!!! A holding period of 1 to 10 years is “medium term”. While this is not cast in stone, a 10 year period comfortably covers 2 business cycles. It thus makes our point of entry less impactful. Even if you invested during the peak of a cycle, you are likely to see higher peaks as we ride into the next business cycle. Thus, if we are not in the game for at least 10 years, we are not really “long term” investors.
2. Buy Right, Sit Tight
It is true that wealth creation happens through long-term investing. However, due importance must be given to the price at which an asset is acquired. If I have bought a dot com stock in the year 2000 for an absurd price, I can’t be expecting it to make me rich merely by holding it till 2030. This is more relevant to direct investments. Still, a Fund manager who is not following this strategy is likely to disappoint investors.
3. Fill it, Shut it, Forget it Syndrome
When I was in school, Hero motors (then, Hero Honda) advertised its fuel efficient motorcycles with the caption, “Fill it, Shut it, Forget it”. As a student, I have attended seminars wherein speakers have spoken about long term investing in the same vein. My experiences have suggested otherwise. Long term investing is NOT “buy and forget”. It does not mean “do nothing”. Periodic review is critical.
Periodic review does not mean checking on your portfolio on a daily basis. However, a quarter is a good time, because companies declare results on a quarterly basis. Even if you are a Mutual Fund investor, MFs react to corporate performance trends. A review does not necessarily mean action and more importantly, immediate action. You need to soak in the news, analyse and then decide if an action is required.
(Stocks or) Funds need not be sold if they have doubled in value. Similarly, (stocks or) funds giving a negative rate of return need not be thrown out. It makes sense to understand the reasons for the same. Are the causes permanent or temporary?
4. Keep Emotions out of investing
whether it is long term investment or day trading, one needs to keep the emotion out of the equation. One of my professors would often remark: “A true finance professional would never die of a heart- attack”…………. “Because that part did not exist in the body”. EGO can prevent a person from seeing reality. It makes him/her behave in a manner that justifies his/ her earlier action. Even if the person knows that the decision was wrong and needs to be reversed.
5. Be Watchful of Valuations
There is a lot of debate on high P/E and low P/E stocks. High P/E stocks can be termed “expensive’. There are quite a few companies that enjoy high investor confidence. Their P/E ratios are high. However, there are many companies that do not deserve their high P/E ratios. I would prefer to miss out on a few high P/E ratio stocks that could deliver “multi-bagger” returns, than to lose hard earned money chasing high P/E ratio stocks on account of their “potential”.
6. Do your own research!
Go through the Fund Snapshot. Understand the investment theme of the fund. Look at its performance over long periods of time. Understand the fund manager’s thought process. Look at top holdings, sectoral allocation and whatever else makes sense to you!
7. Patience, Commitment and Discipline is Key!
Long term investing is all about patience and commitment. Not doing anything is a task that is easier said than done. It requires a lot of commitment to not buy/ redeem, amidst the noise created by the market. TV channels, magazines, newspapers, Research houses, brokerages and your well-meaning friends are full of advice on what needs to be done. A periodic review or a review after an event is all that is required to be done. Tremendous discipline is required to not react to daily noise.
8. Courage and Conviction
Not everybody has the stomach to brave sudden downturns. There can be a sudden and steep 50% fall in the portfolio in 3 months. Unless one is totally convinced about the “long term” prospects of the stock or the investment theme of the fund, sticking it out there is really difficult.
9. Some Quick Don’ts :
- Don’t worry about Short-term Fluctuations. If you must, have a separate fund for Short Term
- Don’t focus too much on the Macros. Macros are important, but we are being bombarded with too many macros. What the Fed will do to interest rates next week cannot determine the prospects of the businesses we are invested in for the next 10 years plus!
- Don’t lose Focus. Do not divert money “for a few days” on a “hot stock” or an NFO (New Fund Offer).
- Unless properly and thoroughly researched, “Penny stocks” are dangerous.
- Do not stop learning. Do not stop the flow of information. Listen to everybody but have your own understanding
- Do not succumb to “Advice”, particularly from the friendly (commission loving) broker.
- Do not leverage. It is very tempting to borrow at 12% interest and invest in stocks that earn much higher returns. Leverage is a double-edged sword and it cuts very deep not just into our pockets but into our hearts. We want to optimally invest our hard earned savings. We are not in the business of creating wealth.
Long term investing is easier said than done. You need to buy right, review periodically, have patience, commitment, discipline and most importantly, the willingness and ability to understand and reach own conclusions. However, this is not undo-able. If you can make it, nobody can stop you from getting Uber Rich!