Most people seek to find an edge in investment in making money in the shortest time frame possible. A common consensus among value investors is to screen and locate stocks that are mispriced by the market by means of information arbitrage. This makes it more exciting to uncover a small cap stock that can be the next Amazon, Tesla, Netflix or Facebook – something that the market haven’t noticed yet. However, given today’s technology and information network, information travels faster than ever before. The informational gap between small cap stocks and large cap stocks is smaller than many of us realise and informational advantage over others is not as easy to obtain as before.
However, the most underrated advantage to have as an investor is time. This creates a huge advantage for investors who choose to focus on a longer time horizon. Just as investors we are looking for companies with quality management that focus on creating long term shareholder value, we also must be patient and focus on the long term vision of the company. As investment time frames continue to get shorter and shorter, the advantage of an investor with a long time horizon is increasing.
Benjamin Graham, who wrote the timeless classic The Intelligent Investor, wrote that in the short run the market behaves like a voting machine; however, in the long run it resembles more of a weighing machine. Short term volatility due to fear and other market emotions can drive short-term market fluctuations, resulting in a disconnect between the share price and intrinsic value of a company’s shares. However, in the longer term, the characteristics of a weighing machine weighs in on a company’s fundamentals and competitive edge and will eventually cause the intrinsic value and market price of its shares to converge.
Source: Euclidean Technologies Management
The majority of investors place more emphasis to gain an advantage on whether or not a company will be able to beat analysts’ expectations in the next financial quarter, which is mainly just noise in terms of what really matters to a company’s long term value. CEOs have complained often about the process in which companies try to meet the expectations placed on them by Wall Street analysts, and markets move on those results. This makes short-term underperformance resulting in a potential selloff. In fact companies can shortchange their long-term interests by trying to meet short-term goals.
The key factor when choosing companies should be to invest in companies with a durable competitive edge. While there is nothing wrong with paying close attention to near-term results, they are of secondary importance. Instead try focusing on determining that the long term competitive advantage of a company remains intact.
“Nobody buys a farm thinking if it is going to rain next year. They buy it because they think it’s going to be a good investment over 10 to 20 years” -Warren Buffett
“One of the consequences of such a short investment time horizon is that investors have begun to fear short-term market events and volatility as much or more than the factors that shape prospects for long-term economic and profit growth that drive stocks over the longer term.” – Jeff Kleintop.
Therefore, too much emphasis is on the next quarter’s earnings and analysing any potential catalysts that can help beat or miss expectations. Long-term investors are willing to buy into an uncertain short-term outlook could have purchased stocks of a quality company. The buyer of the stocks can have a very different time horizon compared to the seller who was selling shares simply because of a bad near term outlook. Most investors own stocks for short periods of time; while moats or the competitive edge of a company matter in the long run.
“When forced to choose between optimising the appearance of our GAAP accounting and maximising the present value of future cash flows, we’ll take the latter.” – Jeff Bezos, 1997.
Therefore, it is more important to shut out the near term noise and maintain the mindset of a long term investor. Thinking long term seems much harder than it is to execute amid news headlines and analysts’ opinions. The best part is that as long as Wall Street focuses more on the short-term, the advantage of long-term investing will keep increasing. Therefore, instead of focusing on the short-term changes in price, try focusing on the long-term changes in moats. This can give investors a significant edge.