Investing for Long Term
How Long Is Long Term?
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The first lesson in value investing is to stay invested for a long term. This is based on the premise that in the long run, the intrinsic value of the security will be recognised by the market, thus enabling the value investor to reap the rewards of his patience. Long term time frame, also smoothens the effect of fluctuations. If you were unlucky to have bought a script at the peak of trade cycle, and though your investment is fundamentally sound, you will still find the price of your investment heading south. If you are convinced about the fundamental value of your shares, and are confident that the value has not deteriorated in between, you may have to wait for the market to recognise the potentials of your script. This process may take quite some time.
The fall in prices of fundamentally sound shares should give you an opportunity to buy rather than sell, provided, of course, that you have done your homework well, and know that the market price is deviating from the true value creating a Margin of Safety for you, a concept central to the disciple of value investing.
If your answer to any of the following two questions is in the affirmative, you are probably not a long term investor:
Staying invested for long term has other benefits too. Many short-term traders make more money for their brokers than they make for themselves. Many a time they would be losing money while the brokers make all the money that is there to make. While the brokerage may look like a small figure to you, constant buying and selling adds to a whopping sum. Add to this the cost of many hours spent in keeping track of the live market quote, and it does not look like a worthwhile proposition.
You pay zero tax when you sell of your investment after a period of one year from the date of purchase. This is the greatest reward the Income Tax department gives you for staying invested for long.
Now the million-dollar question, how long is the long term?. You ask ten investors and you are likely to get ten different answers. Strangely enough, barring the day traders, and pure speculators, most players in the market are likely to say that they are long term investors, without even giving a thought to what time horizon they are talking about. For many investors the long term is one year, the statutory minimum the Income Tax Act specifies for the purpose of calculating the tax on long term capital gains.. This period was three years earlier, and this class of investors perhaps think that the Government also thought three years to be too long, and has decided to curtail the period to one year.
For disciplined value investors, the long term is an entirely different concept. It is time sufficient for the market to recognise the true value of a particular script, and this may sometimes take many years, some times a couple of major crashes and booms!
It is said that more money is made in being static rather than by being hyperactive in the market. Daily fluctuations should not bother a long term investor. The average holding period of investors like Warren Buffett has been 10 -12 years. Remember, this is the average, some of the investments they would hold on to for 20 or 25 years or more. Focusing on the short-term aspects of a company including both business and price fluctuations is contradictory to the value investment philosophy, and Buffett rightly said. “Most of our large stock positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, not by prices on any given day.”
It is like being wedded to your stock- for life. Unless there is a change in company’s economics, for worse, you would continue to hold the share for eternity. It follows that when you are evaluating a company, you must give due weightage to the quality of management as well. Warren Buffett explained this factor by observing that you should choose the President of the company (that is, evaluate the quality of the management) the way you would choose your son-in-law.
If you have chosen your company properly, and the share grows at a rate substantially higher than the cost of money it would be wiser to stay invested in the company for a fairly long period of time. A company which you bought in a depressed condition, and which keeps growing at a CAGR or 20% is likely to outperform the market for as long as the company maintains the growth rate. If the rate of growth is an accelerating growth, you would do well to stay invested in that company for life, though not many companies would qualify through this filter perpetually.
Compound interest is one of the most powerful forces in the financial world, and if you stay invested for a long term period of time, you are bound to see the magic of compounding at its fullest.
When the most influential economist John Maynard Keynes said, “In the long run we’re all dead” he was certainly not referring to the stock market. He was referring to the counter-cyclical demand management policies that the governments ought to be following in the short run.
The bottom-line is that since it is impossible to predict whether you are now at the top of a bull run, or at the beginning of a long period of depressed market, it always makes more sense to stay invested for a sufficiently long period of time. Historically the longer the period of investment in equity, the higher is the return and the lower is the risk of losing your capital. If you are likely to need money within 5 years, stay away from the stock market. Like the fabled tortoise that beat the hare in the race, the investor who stays in for the long term is more likely to achieve his goals than the investor who chases “hot tips” for quick profits in the stock market.
Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The first lesson in value investing is to stay invested for a long term. This is based on the premise that in the long run, the intrinsic value of the security will be recognised by the market, thus enabling the value investor to reap the rewards of his patience. Long term time frame, also smoothens the effect of fluctuations. If you were unlucky to have bought a script at the peak of trade cycle, and though your investment is fundamentally sound, you will still find the price of your investment heading south. If you are convinced about the fundamental value of your shares, and are confident that the value has not deteriorated in between, you may have to wait for the market to recognise the potentials of your script. This process may take quite some time.
The fall in prices of fundamentally sound shares should give you an opportunity to buy rather than sell, provided, of course, that you have done your homework well, and know that the market price is deviating from the true value creating a Margin of Safety for you, a concept central to the disciple of value investing.
If your answer to any of the following two questions is in the affirmative, you are probably not a long term investor:
- Do you believe you can time the market—buy when prices are low and sell when prices are high?
- When the market starts to decline, do you sell your investments to try to lock in gains?
Staying invested for long term has other benefits too. Many short-term traders make more money for their brokers than they make for themselves. Many a time they would be losing money while the brokers make all the money that is there to make. While the brokerage may look like a small figure to you, constant buying and selling adds to a whopping sum. Add to this the cost of many hours spent in keeping track of the live market quote, and it does not look like a worthwhile proposition.
You pay zero tax when you sell of your investment after a period of one year from the date of purchase. This is the greatest reward the Income Tax department gives you for staying invested for long.
Now the million-dollar question, how long is the long term?. You ask ten investors and you are likely to get ten different answers. Strangely enough, barring the day traders, and pure speculators, most players in the market are likely to say that they are long term investors, without even giving a thought to what time horizon they are talking about. For many investors the long term is one year, the statutory minimum the Income Tax Act specifies for the purpose of calculating the tax on long term capital gains.. This period was three years earlier, and this class of investors perhaps think that the Government also thought three years to be too long, and has decided to curtail the period to one year.
For disciplined value investors, the long term is an entirely different concept. It is time sufficient for the market to recognise the true value of a particular script, and this may sometimes take many years, some times a couple of major crashes and booms!
It is said that more money is made in being static rather than by being hyperactive in the market. Daily fluctuations should not bother a long term investor. The average holding period of investors like Warren Buffett has been 10 -12 years. Remember, this is the average, some of the investments they would hold on to for 20 or 25 years or more. Focusing on the short-term aspects of a company including both business and price fluctuations is contradictory to the value investment philosophy, and Buffett rightly said. “Most of our large stock positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, not by prices on any given day.”
It is like being wedded to your stock- for life. Unless there is a change in company’s economics, for worse, you would continue to hold the share for eternity. It follows that when you are evaluating a company, you must give due weightage to the quality of management as well. Warren Buffett explained this factor by observing that you should choose the President of the company (that is, evaluate the quality of the management) the way you would choose your son-in-law.
If you have chosen your company properly, and the share grows at a rate substantially higher than the cost of money it would be wiser to stay invested in the company for a fairly long period of time. A company which you bought in a depressed condition, and which keeps growing at a CAGR or 20% is likely to outperform the market for as long as the company maintains the growth rate. If the rate of growth is an accelerating growth, you would do well to stay invested in that company for life, though not many companies would qualify through this filter perpetually.
Compound interest is one of the most powerful forces in the financial world, and if you stay invested for a long term period of time, you are bound to see the magic of compounding at its fullest.
When the most influential economist John Maynard Keynes said, “In the long run we’re all dead” he was certainly not referring to the stock market. He was referring to the counter-cyclical demand management policies that the governments ought to be following in the short run.
The bottom-line is that since it is impossible to predict whether you are now at the top of a bull run, or at the beginning of a long period of depressed market, it always makes more sense to stay invested for a sufficiently long period of time. Historically the longer the period of investment in equity, the higher is the return and the lower is the risk of losing your capital. If you are likely to need money within 5 years, stay away from the stock market. Like the fabled tortoise that beat the hare in the race, the investor who stays in for the long term is more likely to achieve his goals than the investor who chases “hot tips” for quick profits in the stock market.
Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com
posted by Dr. Tejinder Singh Rawal at 5:52 am
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