Value Investing Myths

Investing for the next ten years? Are you nuts?

Many people baulk at the idea of long-term investing, since it is fraught with uncertainties. However, a long-term approach to investing could be highly rewarding

Investing for the next ten years? Are you nuts?

The concept of long-term investing is, for all practical purposes, dead. Many investors in this age of by-the-minute business news channels associate long-term investing as holding a stock for a whole one year. Gone are the days when we would still have the shares that our fathers or grandfathers bought. And we are paying the price for this - dearly!

Busting the myth
The main criticism against the long-term buy-and-hold strategy is that we live in a world that is changing by the day. Nothing - not even profits, market shares or the stock price - remains as it is in the future. So, the best course of action is to buy and sell.

Amateur investors alone don't fall for this view. A top-ranking Mumbai-based fund manager said, "How can you say what will happen in ten years? We may have a war in the Middle East, crude can shoot up, hell we may even be very close to World War III!" And that was the end of discussion on long-term investing.

Buffett has been a long-term proponent of investing for the long-term. "I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be 10 years from now. If I can't see where they will be 10 years from now, I don't want to buy it. Basically, I don't want to buy any stock where if they close the NYSE tomorrow for five years, I won't be happy owning it... People buy a stock and they look at the price next morning and they decide to see if they are doing well or not doing well. It is crazy. They are buying a piece of the business. That is the most fundamental part of what Graham taught me," (Lecture at the University of Florida Business School, 1998).

The coffee-can approach
Michael J. Mauboussin, earlier Chief Investment Strategist at Legg Mason Capital Management, wrote about the coffee-can approach to investing. This was a real-life story about an investor in the US who would buy $5,000 worth of stocks and put their share certificates in a safe deposit box. The investor did nothing about them. After his death, it was found that some investments turned into losses and were valued at $2,000, many others were valued at over $100,000 and one investment had gained a value of $800,000!

This real-life story will elicit different reactions among different individuals. Some would say you cannot buy and forget; some others would reminisce that is what their fathers did. But the key lesson is not buy and forget. The intended lesson is that it is wise not to get carried away by market fluctuations and you must stick to your investments. This is the essence of Buffett's investing style. "Lethargy bordering on sloth remains the cornerstone of our investment style." (Annual Letter, 1990).

Heed the advice of Munger, Buffett's partner in investing. "Don't pay attention to 3-5 years." Investing is a longer-term game. The most successful investors in history swear to that.

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