Know when to hold ‘em
Building wealth takes time. Sure, you can make a quick buck. Flipping a house. Timing a commodities trade just right. Winning the lottery. But there’s a reason why people say “get-rich-quick scheme” not “get-rich-quick investment strategy.” Amassing a fortune doesn’t typically happen overnight.
Sustainable ideas need sustainable profits to succeed as enterprises. And, enduring businesses with a stable financial track record can make a bigger difference on issues related to investor values.
That’s why at Censible, we think long-term when evaluating options for our clients. And whether or not you’re a Censible client, there are lots of reasons to think about the long term when you’re making financial decisions.
Keep good company
Warren Buffett is widely regarded as the most successful investor of all time. Over the past 70 years, his commitment to long-term investing has turned $6,000 into $67 billion. Seventy. Years. Nearly $70 billion.
Buffett made his fortune following the teachings of Benjamin Graham: undertaking exhaustive research to choose the right companies to invest in, then hanging onto those investments for the long haul.
Someone is sitting in the shade today because someone planted a tree a long time ago.
One of Buffett’s best-known quips came in a letter to investors in 1988: “Our favorite holding period is forever.” Clever and true. But it’s worth reading a few more lines of that section, because it offers a remarkably clear and concise summary of the value investing style that made Buffett one of the wealthiest men in the world.
To paraphrase: Do your homework. Find well-run companies whose stocks are selling at a discount. Pick a small handful of them and buy as much stock as you can. Don’t sell them upon reaching some arbitrary profit goal. But don’t be afraid to ditch them if they are not performing. Otherwise, hang onto them forever.
Investing is not gambling
Gambling is all about quick returns. High risk, high reward. And the financial markets offer lots of opportunities for people to gamble with their capital. Whether it’s global currency speculation, playing the commodities markets, or day trading securities, a short-turnaround, jump-in-jump-out strategy that banks on volatility is very different from the reasoned approach a mindful investor takes to long-term wealth building.
As we see it, mindful investors go to great lengths to understand the companies they invest in, and in the end, that helps minimize risk. When you invest in a well-managed company, you’re a lot more likely to avoid painful surprises when you check your quarterly statement. And, even when you do have the inevitable down quarter (or year), a long-term strategy is designed to smooth over the volatile times and achieve incremental gains over the long haul.
You’ve got other things to do
Don’t get us wrong. Day trading, playing the commodities markets and global currency speculation aren’t intrinsically bad. Done properly, they can be highly profitable and rewarding. But even if you have the skills to manage your money in these markets, do you have the time?
Actively managing an investment portfolio can be incredibly time- and labor-intensive. On the other hand, mindfully crafting a portfolio for long-term wealth building involves relatively few periods of intense, active decision-making, surrounded by long periods of passivity, i.e., living your life and watching your money grow without worrying about call spreads or whether the Chinese are tampering with the value of the yuen.
Ownership has its privileges
Mindful investors with a long-term approach don’t just buy stocks. They invest in companies they believe in. In many cases, they buy into companies they know (a concept championed by Peter Lynch) and watch their investments grow with them over time.
And companies, in turn, may reward their investors’ loyalty with dividends. Tasty little dollar-shaped treats, lovingly delivered each quarter.
Warren Buffett talks a great deal about “book value” versus “business value”—in short, a calculation of the present dollar value of a company, as compared to an analysis of its underlying worth and future earnings potential (read more). Finding a company with a discounted book value, a promising business value, and a well-articulated corporate social responsibility platform should be the mindful investor’s dream for long-term ownership.
Compounding: Multiply your money
The simplest reason to invest for the long-term is also the most compelling. Compounding is the process of making money on reinvested profits. The more you reinvest, the more you can potentially earn. It’s like a money snowball.
Reduce risk and ride out the storms
By taking a long-term approach, you’re less likely to get devastated by market corrections. Volatility can be scary. Lots of folks’ portfolios lost a third of their value or more in the 2008 global financial crisis. But the market recovered. And those who stuck with their investments have recovered as well. Those who ditched their equities in pursuit of “safer” investments, however, may have missed out on the recovery.
Take a look at this chart. Over the course of 20 years, a $10,000 initial investment in an S&P 500 index fund would have yielded more than $65,000. But by pulling money out of the market during periods of volatility, an investor would have put himself at risk of missing out on a great deal of that appreciation—or even losing money, by missing 40 or more of the best days of market performance.
Of course, no one knows when those “best” days are going to happen. But common sense dictates that you’ll be present for all of them if you don’t take your money out of the market when the bad days appear.
Value from your values
Most investment goals are tied to long-term priorities. Retirement. The kids’ college fund. Buying a solid-gold house and a rocket car. These things take time. There’s nothing wrong with making a quick buck, but we all know Aesop’s old fable: slow and steady wins the race.
Values-driven investing lends itself to the long term. Most of us hold our values pretty strongly, and we’re likely to stick with them. And when you know your guiding principles will probably hold steady, it makes sense that you’d look for investments that can perform to your standards in the long term, not just for now.
Back to Warren Buffett. Know your priorities, do your homework, buy low, and have patience. Let the businesses you own do their thing. When you’ve found something valuable, it’s generally in your best interest to hold onto it. Letting go could be a costly mistake.