Some thoughts on short termism
The stock market has been around for several centuries now, and despite the proven effectiveness of a long term investment strategy, there's still not much competition in this arena.
Lower transaction costs and greater access to investing platforms have been great developments for society, but they generated an increased focus on stock prices rather than the underlying businesses.
The media and Wall Street have also been strong catalysts for shrinking investment horizons.
People focused on the ST bring more clicks to the media and more fees to Wall Street, irrespective of market conditions. They always win as long as investors focus on daily quotes.
The above, coupled with the innate human desire for "quick" money and our emotional behavior has led to rapidly-changing investment thesis, which plays advantageously for long term investors.
Volatility is surging all around and opportunities arise from time to time.
Many investors continue to focus on what will happen in the next Q or even year, but rarely does a company change during that time.
The problem about short term thinking is not ST thinking per se, but the fact that it makes you ask all the wrong questions.
LT thinking guides investors towards asking the questions that really matter for shareholder value creation, such as topics related to moats, management etc
If your investment horizon is less than 3-5 years, rarely do these topics matter.
The short term will probably hide a weakening moat or a lousy management team. These don't really matter. What matters over the ST is mostly macro and investor sentiment.
Macro and investor sentiment are indeed embedded in the price of a stock (which is also important), but their importance tends to fade over longer periods.
Business quality is durable and compounds, macro and investor sentiment are episodic.
The beginning of any investment thesis must begin with the right questions, or else we would end up adjusting our investment horizon to fit our research and not the other way around.
Great points on ST Leandro!
I completely agree with you. From my observations, it seems people really have a hard time thinking past a quarter or a year. Even people who claim to be long-term oriented do things that make no sense:
- Time the market to enter into positions
- Trading in and out of positions based on prices even though they think it has great long-term prospects
- Waiting to open a position because they expect a recession to drop prices
These are all actions that scream ST to me.
Love this! We're always extolling longterm thinking but don't always talk about why. Wondering what you might tell an investor who says that any stock in their portfolio is always for sale at the right price and that they care more about small wins and their portfolio's overall return than holding individual positions for years on end?