One of the most important and interesting business 'concepts' I…
A good friend of mine and I were discussing about stock selections. He asked about a particular stock I had bought before and asked about the prospects. I mentioned to him that I’ve actually sold my holdings a couple months ago and gave him my reasons. He said he thought I was a long term investor. I told him I’ve held it for over two years. He then mentioned that Warren Buffett’s definition of long term investment is more than three years.
To be honest, I have no idea how Warren Buffett defines a long term investor. I’ve read some of his essays and if I’d have to guess, his definition of a long term investor may be someone who holds their stocks for over 5 years, 10 years, or matter fact for his or her lifetime. In fact, he might even resent defining who a long term investor is (he might say the definition of an investor implies long term, otherwise we’d be a speculator).
Most people get too obsessed with the technicalities of investment, but today I’m going to focus more specifically on the definition of a short term investor and a long term investor by posing this question, “Who cares?” Not only will everyone have different definitions of what those terms mean, the thing is it may not be that important at all! I ask because as the investing world becomes more complicated and jargon filled, people lose sight of the ultimate goal of investing – to make money with money. To allocate capital efficiently that provides the highest return you can attain.
I do believe in holding equities for the long run (more on this below), but this is not to say that I must only conduct long term trades or hold my stocks for a minimum amount of years before I sell it. If you told me that there was a trade that would give me 50% return on capital invested within a matter of minutes, and I had every reason to believe you, the math was there to prove it, and the risk involved was minimal, this would have been a trade I would most definitely engage in.
My ultimate philosophy is to buy companies when their stock prices are undervalued, and sell them when 1) their business prospects are no longer as good or 2) they are way overvalued or 3) another company (or product) presents itself as a better investment than the current one or 4) I need that money.
Some people will say I’m considered a long term investor because my approach to buying equities is to buy and hold for years. But it’s not because I want to become a long term investor that makes me a long term investor, it’s because the philosophy behind it makes the most sense to me. Short term trading and speculation more often than not allows stock prices to fluctuate for reasons unrelated to the company valuation, or the reasons involved caused these stock prices to fluctuate more or less than it should, causing a mispricing. But by holding on to the company’s equities long term, stock prices will generally conform to reach the “true” valuation of the company. The stock prices will ultimately be driven by the important factors, the relevant factors, that will truly affect the company’s valuation. Given that your valuation of the company is correct, you should be able to be much more consistent in making money when holding equities for a longer duration.
Imagine an analysis you did with Company ‘Katz Entertainment’ (a fictitious company I’ve just named, sorry if it does exist). The current stock price is $5, your analysis tells you it’s worth $10, and so you buy it. One month, or even six months, or even one year from now, the economy experiences a financial crisis and the price drops to $2. Since you’re a short term trader, does that mean you are going to sell it?
What I’m trying to say is, it’s not because we are short term traders or long term traders that make us have to do certain things to fit the criteria. Rather, our investing should be guided by our philosophy, our approach, and what makes the most sense for us, and this will influence us in holding our equities for the shorter or longer duration. Short term trading and long term trading are the results from our philosophy, not the causes. For me, holding on to equities makes the most sense (as stated above) and therefore I tend to sell my equities months or years after they are bought. But hey, if you have an investing philosophy that allows you to buy and sell stocks within minutes or days, suits your personality, and works for you, then you should go for it.
So think about it… what is your approach towards investing? Why do you believe in it? How does it influence your investing style? Share with us below.