Brett Schafer's avatar
$27.4m follower assets
Is it a mistake to completely ignore the short-term?
This is an excerpt from our free Sunday newsletter for the Chit Chat Money podcast:



"I’ve been drafting up our annual client letter for 2022. We like to share our letters in public not just for marketing purposes but to help other people on their investing journey. The same goes for the podcast and this newsletter.

We made a few mistakes in 2022, but none bigger than sizing up positions in stocks that had identifiable short-term risks and traded at premium earnings multiples. As you may have guessed, that was a recipe for disaster (luckily for only a few holdings) that we want to try and avoid in the future. To do so, we want to add more scenario planning around what a stock might do over the next few quarters into our analysis while still focusing on a 3 - 5 year timeframe. This should help us avoid larger drawdowns on individual positions even if we think the stock looks attractive at current prices. In these scenarios, there is a high chance it might get much more attractive a few quarters from now which we don’t want to restrict ourselves from going after by taking too large of a position at a higher price.

Putting emphasis on the near term doesn’t mean becoming a hyperactive trader. But it can definitely help with the number one rule in investing: don’t lose money.
Obviously, nobody will be perfect in identifying short-term risks, but I think it can be foolish to completely ignore them."

What do you guys think: Is it better to completely ignore the short-term or take it in account when making an investment decision?

I've heard good arguments from both sides
Devin LaSarre's avatar
Really depends on your goals, who you have to answer to, and when you have to answer to them.

Being correct on the short-term can be wildly lucrative, but is ungodly difficult.

A likely mistake made by many is not only shifting their focus regarding duration, but also shifting exactly what it is they're focusing on. In the past year I've seen many go from long-term orientation with a specific focus on individual equities to a short-term orientation with a specific focus on macro. How many of these people are equipped for such a change? I'm guessing very few - and it will probably end poorly for most. Time will tell.
Brett Schafer's avatar
@devinlasarre I agree. From our perspective, we think it is best to only use short-term (in this case I mean the next few quarters) risks as a reason to lower a position size and/or keep it on the watchlist. But the only reason to buy a company is if it has a durable competitive advantage and trades at a reasonable price

Author

Related

Already have an account?