The Loneliness of the Long-Term Investor

The Loneliness of the Long-Term Investor
“Superinvestors” dare to win slowly

By Andrew MacKirdy, Director, Institutional Clients Dept., Baillie Gifford

Taking a long-term investment horizon is one of the greatest opportunities available to us. The success of the best modern-day stock-pickers—who Warren Buffet might describe as ‘superinvestors’—is often rooted in this approach. Their levels of portfolio turnover are strikingly low, with average holding periods of over 5 years. In stark contrast, the average holding periods around the world’s exchanges has fallen to less than a year. The consequence of this widespread short-termism: higher levels of trading, more cost and failure. Never have so many people made so much money by achieving so little.

There are significant challenges to investing for the long term. As Keynes’ put it, “human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.” In other words, the key challenge is to deal with the pleasurable sensation of activity. This temptation is getting harder to deal with as reporting periods contract and investors become overloaded with information. All this stimulus means that institutional investors are now part of the obesity epidemic, preoccupied with accumulating and consuming stuff—they’ve become information junkies who use all this noise as a crutch to justify decisions without thinking too hard while using it to avoid the really appropriate-- but difficult—questions like, ‘what is a company’s competitive advantage?’

Similarly, investors now face what might be called the CNBC effect, which turned every trivial company announcement into a major event that demands a response. This represents a significant challenge because, as the eminent psychologist Daniel Kahneman said, “people are not accustomed to thinking hard, and are often content to trust a plausible judgement that quickly comes to mind.” In other words, we love a good story and we react to it.

Loneliness is another key challenge when investing for the long term. It was Keynes, again, who said that “it is the long term investor …… who will in practice come in for most criticism…For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion.”

And this is where the second key trait of the superinvestors emerges: they find comfort in isolation. They are apparently indifferent to short-term returns. They dare to be wrong and alone and they underperform quite regularly, roughly one in every three years.

How can investors deal with these challenges? First, we can distance ourselves from the madness. We can turn off our Blackberries; only look at our Bloombergs once a month; avoid Jim Cramer and CNBC at all costs and; actually spend time thinking. Second, work in teams. The industry seems determined to go down the star manager route, but the benefit of teams means that different people are stressed by different things at different times. A team helps to reduce the chance of responding to stress rather than reason. Third, retain your best people. This provides an institutional memory which allows you to learn from our mistakes. Fourth, be independent and own and run your own business—it is a constant reminder that business isn’t about smooth quarterly earnings progressions.

This last point relates to the third key attribute of the superinvestors—they very much tend to work for independent fund management companies. The evidence seems clear that independent businesses involved in nothing but fund management are best placed to retain their best people and provide a supportive environment for the eccentric, unconventional and rash.


 




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