Understanding Long-term Investing
Lance Spicer, Editor - Trident Confidential, 6 Feb, 2:44 PM
Most investors want to be just like Warren Buffett, but few, when given the chance will invest like him. Most invest in exactly the opposite way – they then lose money and constitute the majority of investors who rarely do overly well in stocks.Investing just like Warren Buffett is easy, but very few people can do it. They lack one vital thing – patience.
The average investor is not an investor at all – they are “speculators”. They judge their investments based on daily, weekly or monthly movements. They make decisions to buy or sell based not on the long-term outlook of a business, but what happened yesterday, or become caught up in the fear of what might happen tomorrow – this is speculation, not investing.
Most investors are guilty of it and due to the pressure of quick returns, investment professionals (who should know better) also get caught up with it, as they feel that if they don’t follow the bad habits of their customers they will be subject of criticism or redemptions if the results aren’t there in the short-term.
This is a major mistake and one that many fund managers make today. It turns most fund managers into “mediocrity-seeking, index-huggers” that would rather be wrong and average, rather than be right and above average because the time frame of the average investor is so short that wrong and average is “safer”.
It’s best to illustrate this by looking at a Warren Buffett favourite – Coca Cola. As we well know, Warren is famous for saying his holding period of a stock is forever and nothing shows and explains his success and the failure of the average investor better than this chart below.
Warren and average investors both invested in exactly the same stock
and at similar entry points, and even if Warren had bought when everyone
else did, he still would be up 34%. The difference was the holding
period. The average investor sold a perfectly good company – ignoring
all fundamentals, exactly the same fundamentals they relied on so much
to buy the stock in the first place – and sold at 19% loss.This is the
story of their investment lives. Warren on the other hand is up 54% in
exactly the same stock.
(Please note: This stock was chosen as an example as it is one that Warren is just an ordinary investor in, like any other person is, and has no extra influence or information about the share.)
It’s pointless doing all the research and finding a great investment for the long-term, if at the first sign of trouble, you dump the lot, take a loss and go to cash. It seems to me that most investors forget what they have invested in and have disregarded common sense totally.
Let me give you one more example of less than sensible behaviour. Just say you own a coffee shop, it’s profitable, it has it’s bad days and good days – but over a given period, the business is good. Now, you buy the newspaper and you read that economic conditions could get worse next year, do you immediately put up a for sale sign? Only to take it down a week later when you realise the journalist overstated the issue. No, of course you don’t – so why do it with the other businesses you own - your shares?
The Warren Buffett Investing Secret? He buys when everyone is selling, he buys the right companies and then holds them for a very long time.
The “average investor” does not do this – the average investor wants profits right now and has no patience to wait for results.
The reason? They don’t understand the companies they have invested in, so therefore buy them in ignorance, and sell them the same way. The “average investors” are the first to become “greedy” and the first to become “panicked” – they are not equipped emotionally and therefore the market moves against them every time.
Successful investors are contrarian – they go against the “crowd”.
For more information on our program click here
(Please note: This stock was chosen as an example as it is one that Warren is just an ordinary investor in, like any other person is, and has no extra influence or information about the share.)
It’s pointless doing all the research and finding a great investment for the long-term, if at the first sign of trouble, you dump the lot, take a loss and go to cash. It seems to me that most investors forget what they have invested in and have disregarded common sense totally.
Let me give you one more example of less than sensible behaviour. Just say you own a coffee shop, it’s profitable, it has it’s bad days and good days – but over a given period, the business is good. Now, you buy the newspaper and you read that economic conditions could get worse next year, do you immediately put up a for sale sign? Only to take it down a week later when you realise the journalist overstated the issue. No, of course you don’t – so why do it with the other businesses you own - your shares?
The Warren Buffett Investing Secret? He buys when everyone is selling, he buys the right companies and then holds them for a very long time.
The “average investor” does not do this – the average investor wants profits right now and has no patience to wait for results.
The reason? They don’t understand the companies they have invested in, so therefore buy them in ignorance, and sell them the same way. The “average investors” are the first to become “greedy” and the first to become “panicked” – they are not equipped emotionally and therefore the market moves against them every time.
Successful investors are contrarian – they go against the “crowd”.
For more information on our program click here
