At my job, the hardest thing I do is not finding great companies. There’s lots of literature on how to systematically find opportunities and profit from them. As long as you apply that literature consistently over time, you get the eventual result. The hardest part of my job is encouraging other people to extend themselves into long term thinking mode in order to profit from those opportunities. I’ve found the main issue is that everyone says they want good long term results, but few are willing to think long term to get them. I’m lucky in that the vast majority of my clients appreciate the benefits of long term thinking and are good long term thinkers themselves, but we all need some encouragement now and then.
So what does long term mean? When I was in grade school, long term meant 10pm that night. As a teenager, it meant that weekend. In my 20s long term was anything three months away, coincidentally that’s just about the time between mid-terms and exams. Today in my thirties, long term means somewhere five to seven years down the road. At this pace, by the time I’m in my forties long term will likely mean ten to twenty years away. I’m sure some of my readers in their 70s and 80s are laughing right now at their long terms.
But if long term thinking was just a matter of age, then older investors should be more inclined to thinking long term than younger investors. However that’s just not the case. Instead, I believe long term thinking is a function of one’s age/experience, but more importantly their patience, and their expectations.
Since there’s not much we can do about changing someone’s age, maybe we can encourage long term thinking by asking people to be more patient. But I think that’s pretty hard to change too. Patience in my opinion is really a matter of temperament and personality, things that are hard wired, and hard to teach. Either you’re the type of person that gracefully endures under pressure, or you’re the type of person who succumbs to the hastiness of wham-bam-thank-you-mam.
That leaves us with the last and most important element of long term thinking, setting expectations. If an investor can set reasonable expectations about things like return, risk, and volatility, they will find very few things surprise them in the short term, which in turn helps them to stay engaged for the long term. The good news about setting expectations is that unlike age or temperament, expectations are totally within the investors’ realm of control. Any investor can do the homework and have the discussions to form reasonable expectations about the investment process and its long term results.
That means if you find yourself getting caught up in short term behaviour like quarterly earnings, comparing month to month statements or obsessing over the daily change in prices, it’s likely not your age, or your patience that’s causing your short term focus – it’s likely your expectations aren’t grounded in a realistic way. Ask yourself if you have access to the information required to form expectations, ask yourself if you have the education or training to understand that information, and finally ask yourself if you have the context to compare your expectations against other options.
And that’s why two people with the exact same quarterly investment result (good or bad) can have very different opinions of how good or bad that result is. One person frames the result in the long term context of reasonable expectations, while the other person lacks that context and reverts to short term reactionary behaviour.
So if investment success hinges on maintaining a long term outlook, and a long term outlook hinges, in turn, on forming reasonable expectations, then investment success accrues to the people forming the most reasonable expectations. And that seems quite reasonable to me.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.