It's always risky to challenge a
belief that has wide currency among people. This is not only because we like to
keep a tight grip over our beliefs, but also because by the time we realize the
truth we may have already made a huge commitment and it is difficult to retract
now. Nonetheless, it is always in one's interest to at least understand, if not
wholeheartedly accept, the contrary perspective.
One widely accepted and sacrosanct
belief is long-term investing. The financial community teaches the merits of
long-term investing in unison. “Invest for the long term and you will do
well”—this is the jingle which accompanies almost every statement that the
financial community makes. Indeed, it has examples to cite that support the
belief. The most frequently given example is of the market index, which has
gained significantly over the long term. So, as the argument goes, if you had
invested in the market ten years ago, you would have made fantastic gains. When
you weigh the argument against reason, you have no other option but to believe
it.
However, things aren't so simple.
Consider the following points:
What if the long-term investing theory
fails to work in your case? You are a long-term investor and you believe that
everything will eventually turn out to be okay. What if you get a bad surprise
after many years of having made your investment? Will you have time to undo the
effect? Let's say you buy a financial product today and wait patiently for ten
years to allow it to work. Ten years hence you notice that the investment has
given paltry to no (or even worse, negative) returns, what do you do now?
The long-term investing idea is the
ultimate cover-up for lack of performance: Your financial product isn't
performing, but you hold onto the product because you are told that over the
long term it will do well. You own the stock in a company which is doing
poorly, yet you don't exit from it because you think that over the long term it
will recover and deliver returns.
The long-term investing idea relieves
you from the responsibility of tracking your portfolio: Since you are invested for the long
term, you don't make any decisions and justify your inactivity by saying that
you need not make any decisions in the short to medium term. When you are
investing in stocks, you are in the business world and you have to be
periodically making decisions. You should be consistently monitoring your
portfolio to determine what to buy and sell. You should be consistently
monitoring your companies' performance. Now I am not saying that you worry
about your stocks on a daily basis. All I am saying is you can't really set
your hands off them completely for a prolonged period of time. That's a recipe
for disaster.
Long-term investing can result in
unnecessarily waiting for “better” results: Stocks don't always follow the
long-term rule. A stock can very well appreciate in a couple of months and hit
a high level. When the market is willing to pay you an excellent premium on
your buying price, you should be willing to sell. However, the long-term theory
keeps you from selling “early.” Unfortunately, as the bull run in the stock
fizzles out and it goes down, you lose the opportunity. What's more, you still hang
onto the stock as now you have seen it attain a higher level and you would
rather wait for that level to arrive again—of course, over the long term.
Your long-term mindset works in favor
of the financial community: The financial community gets to keep your money for the
long term. Its accountability for results also reduces if you believe in the
long term. Warren Buffett, the iconic investor, had sold off all his stocks in
1969 as the valuations were rich. He stayed out of the market for around two
years after that. Will a fund manager do so? He can't because the company wants
the fund running. He can't sell off the entire stuff and sit on cash. In fact,
as the new money comes in, he will be buying the stocks in his investment
universe, no matter what the valuation. Since he will have bought stocks at
high levels, he will have to stay invested for the long term to deliver
returns.
So, the conclusion is that in the
stock it isn't important that you stay invested for the long term. What is
important is that you buy, sell, and track your portfolio as per a fixed
strategy. It doesn't matter if you are invested for the long term or the short
term. What is important is that you sell as per your strategy. Since the
selling price of a stock may be far from the buying price, holding the stock
for the long term may become necessary, yet it's not indispensable. You can as
well make profits in the short to medium term.
The writer is the author of Stock Market Investing for Employees.
