A disclaimer to start with; this article is not meant to be taken as investment advice and I am certainly not qualified to give such advice. What I am narrating here is based on common sense and my own experience.
As we witness another significant fall of the stock market, our human survival instinct is to cut our losses, sell and run away. The buying and selling will depend on your life perspective and whether you are inherently an optimist or a pessimist. Human beings are known for finding patterns when none exist and make predictions based on guessing what is coming next. Guessing means there is no evidence and hence the narrative swings to whichever way we would like it to be.
We also tend to think in isolation; if we predict the stock market to fall by 50%, we would like to tell ourselves that share values will be the only thing that declines while the rest of the world remains the same.
In reality, if and when we make this sort of a prediction, it is based on our world view being extremely negative – whether this is because of a pandemic or a recession or political uncertainty. Whatever causes them, doomsday scenarios cannot pertain to one particular market or product.
Likewise for the vice versa upswing.
Common sense tells us not to invest for short term gains, which is well understood, although not always practiced. The only sound investment time horizons are long-term and to me, that should not be less than 25-30 years. That kind of timeline might as well be called ‘forever’.
Think about why people invest in the first place. You invest your savings – which is money you do not need to run your daily life. You want this money to compound over time. However, most people don’t get this. They want to know how to earn the highest returns instead of wanting to sustain good returns for the longest period of time.
To take a simple example, from real estate if I may; if I bought a house to live in 10 years ago and its value has increased 3 times since then – does that qualify as financial gain? Will I sell it because it has given a fantastic return? Or is it irrelevant to me?
After all, I live in this house and it provides adequate space to meet my needs. If I sell it, I will need to buy another similar house which will cost the same or even more. Therefore, I will never sell it unless it stops meeting my needs and if that happens my decision will be driven by my needs – which is completely different to my desire to maximize my returns. The only people who gain from speculative trading are brokers whose business depends on trading volume – irrespective of market direction.
The herd mentality is the killer of value and if you follow the market – buying when the price is rising and selling when it is declining – you are likely to lose money. The reason is simple – when everyone behaves in the same way they will all eventually either overpay or undersell.
Instead, when making buy or sell decisions, long-term investors look for the underlying value of the asset and what it means to them today and in the future.
The important thing to keep in mind as a long-term investor in an asset, is that one would never look at the daily, monthly or even annual fluctuations of value. You need to track your investment over 10-20-30 year periods. And you track it against your needs – just as I illustrated in the case of my house. Do the returns meet your needs? If so, they are good enough!
It is not about me moralizing against avarice – its about what makes sense for us to have a high-quality life!
It is only logical to assume that this sort of thinking will beat speculative worries hands down – and not just monetarily. It is difficult to practice but is the only way to keep yourself sane.
You need to understand that swings in value are not of any interest to you – unless they are driven by the fundamental destruction of the asset. And if that is ever the case, trust me – we will all lose much more than our savings.
In the words of Nassim Taleb, the renowned investment philosopher, “never take investment advice from someone who has to work for a living, unless there is a penalty for the advice”.
Investment managers are incentivized to beat the market. The better the fund manager the higher the returns compared to the market index. The problem is that this is achieved within a short period – a month or a quarter or a year. It defeats the purpose of investors who are holding assets for long-term value creation.
Don’t get me wrong – fund managers and investment advisors are well-meaning professionals. But the advice they give has to be based on short-term time horizons for no fault of theirs. Their clients expect them to provide maximum returns in the short-term. It is rare, for an investment advisor to provide and for a client to care for, performance over 25-30 years.
To conclude, financial investment is like most things in life – a long-term perspective wins every time. The same is true for entrepreneurship, career, relationships – even in real estate – the real winners are those who hold don’t sell properties. Life is a marathon and to complete the marathon you need to make wise choices. The sooner one learns to make them the more the gain.