The Dangers of Short-Termism
We recently had an investor ask us if we had changed our investment approach or financial metrics to evaluate stocks in reaction to the steep rise in inflation, interest rates and general market fears of a recession?
No New Tools Needed
The answer is no. Our three-pronged investment philosophy of i) Financial Strength, ii) The Ability to Grow, and iii) Discounted Valuation is built with a long-term horizon that necessarily incorporates varying economic scenarios. We wonder how an investor could be successful trying to implement a strategy that jumps from financial fad to financial fad depending on short-term economic swings. Our fundamental approach builds long-term conviction in our investment theses and incorporates the passage of time as our ally, versus a short-term approach where time becomes an adversary.
But the question highlights what we see as a general investor lack of confidence in, if not flat-out fear of, the current market.
The Dangers of Short-Termism
The transition of the U.S. Federal Reserve away from its 12-year+ long easy-money and risk-on quantitative easing (QE) program to its current inflation fighting, rate hiking posture has roiled the confidence of investors. In our view, this fear comes from lack of conviction, which in turn is driven by the rise of what we call short-termism.
Reuters and the New York Stock Exchange estimated that the average holding period for stocks had fallen to a paltry 5.5 months as of June 2020, down from 8.5 months in 2019, 14 months in 1999 and 8.3 years in 1960.* With the continued rapid rise of hedge funds, algorithmic trading strategies and commission free trading, we suppose the average holding period has fallen even more as of today.
In our view, short-term strategies inherently lack fundamental conviction. With a short-term mindset, any sort of economic or company data, or even a ‘down day’ on the stock market can lead to an emotional sale decision, precisely because there is no pre-thought view to the long-term value of an investment. Short-term strategies can exacerbate both upside and downside volatility in the stock market, as investors emotionally decide to abandon a trade, or jump into a trade simply because the broader market is having an up or down day. This “following the herd” mindset, in our view, leads to investors selling on lows and buying on highs.
Buy Low Expectations, Sell High Expectations
Buy low expectations and sell high expectations is our interpretation of Warren Buffet’s sage 2003 advice to “be greedy when others are fearful.” In our view, a long-term, fundamentally based strategy, like our three-pronged approach, is critical to build conviction in one’s investment thesis and price target. With a long-term horizon and a high conviction investment case, an investor can use the emotionally driven moves of short-term investors to buy on weakness and sell on strength.
We think the current surge of investor uncertainty and the continued rise of short-termism is
creating good opportunities for investors with longer-term horizons. We recommend investors do their due diligence, think for themselves, stretch their investment horizons and seek to take advantage of the volatility present in today’s markets.
Notes:
Rewey Asset Management is a registered investment advisor in the State of New Jersey.
This material is for informational purposes only and is not a recommendation or advice. Investments and strategies mentioned are not suitable for all investors. No one can predict or project performance, and forward-looking statements are not guarantees. Past performance is not indicative of future results. Investing involves risk, including the loss of principal.