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5 things that long-term investors do differently
Making
investments for the long term is more about attitude than number
A frequent question asked by investors is: how long
is long term? As a research student working with annual returns, I would
have answered the question with the results of my number-crunching
exercises. Having witnessed several market cycles since then, I would now say
that long term is infinite. A long-term investor would want to hold on to
his investments forever. It’s more about attitude than number.
When we choose a career, we do not invest in
ourselves hoping to ‘cash out’ some time soon in order to pursue something
else. Even those who switch careers successfully give their all to what
they do. They invest in their careers as if it was all that they would do
for a long, long time. Long-term investing requires this attitude. What
would we do differently if we were long-term investors?
First, long-term investors take the time to
understand what they are doing and why. Those who buy an IPO because they
have made money mostly by buying IPOs earlier are not long-term investors.
They are only replicating a lazy tactic to make money. If there is no
method to selecting investments, they are not longterm investors. Such
people want to know all about the investments they are buying. They spend
time and effort on learning, research and analysis. Many take offence when
I tell them they have bought a stock or a mutual fund on a whim or a tip. I
then ask them to list their investments and tell me why they bought those.
By the time we reach the fourth item, the truth is out. Most investors buy
without adequate groundwork and think that if they hold it for a long time,
they are long-term investors. This is not true.
Second, long-term investors understand that returns
will be reasonable; they do not expect miracles. If they manage a
multi-bagger stock or a winning fund, they know that in the process of
acquiring this star, they have also bought a few not-so good investments.
They may have exercised the same diligence in selecting the latter. Despite
this, all their investments will not rise and shine. Long-term investors
know that there is no formula for picking winners, that they will be fine
on an average, and hence, keep their return expectations normal. If they
earn a return of 15-16% in the long term, they have beaten inflation,
earned more than the bank deposit rates, and built reasonable wealth.
Getting to this number involves a few losing picks and a few multi-baggers,
and longterm investors know this is the process to build wealth. They do
not insist that each investment earn a high rate of return every year.
Third, long-term investors accept economic cycles
as an inevitable reality. They know that a growing economy will create a
large number of enthusiasts, who will set up, expand, grow and showcase
their businesses as investment opportunities. They know that a cycle of
high demand will take prices up and every business could make profits.
However, they also figure that this optimism would become irrational when
poor quality businesses get money, and when investors are greedy to grab
unknown stocks. When the cats and dogs, as penny stocks are called, tend to
make headlines, the long-term investors know the market has overdone its
enthusiasm. They use this euphoria to get out of the mediocre stocks.
During times of desperation, when the cycle is at a low, the long-term
investors see opportunity. When even the good stocks are shunned, and when
businesses have turned around their balance sheets, they step in to take
advantage of the
cycle. They know that they have to be in tune with
the cycles and time their investments.
Fourth, long-term investors admit their mistakes
and make corrections. Since their investment logic is pre-stated and they
know why they have bought a particular product, they are willing to put
their investments to test. They have learned to identify the critical
factors that impact their investments. If they see the leverage increasing
even as margins are falling, they know that their company needs a
high-revenue growth to stay attractive. If they find that asset acquisition
is not translating into revenue, they know that without the pricing power
that brings a higher margin, their stock will be under stress. They can
track their investment, anticipating a growth path they had envisaged. They
then differentiate blips from course correction and act accordingly. To get
long-term investors to sell, it is important that the case they made while
buying the investment, fails.
Fifth, they do not see investing as easy and quick.
They are more fundamentally grounded. They also know that they are not
alone in the market and that several other players express their views on a
stock. So, they accept gyrating prices as a market reality, but do not see
it as an opportunity to make quick money. They do not buy into tricks and
thumb rules. They see investing as a strategic decision, where they have to
choose, decide the proportion to invest in each pick, monitor and manage
how the portfolio is doing, and take action when the big picture seems to
be changing. This is why finding long-term investors is tough. Those who
bought anything offered in 2007-8, are angry and desperate on finding that
their investment has not provided any return in the past six years. They
ask how long they may have to wait. If they did not buy with the intent to
hold on forever, they were short-term investors. Time will not make their
investment decisions right.
Uma Shashikant, Managing Director, Centre for Investment Education and
Learning.
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