The value of any investment can fall as well as rise and investors may not get back the amount invested.
The average investment time horizon varies widely across different market participants. Pensions savers, for example, have very long horizons – at the other end of the spectrum, day traders may be operating in milliseconds.
Historically, fund managers have sat in the middle, typically holding shares for a few years. But that timeframe has been going down for the past 40 years. The average holding period for a US-listed stock was less than two years in the 1990s and, with the exception of 2019, has been under one year since 2000. It is now legitimate to ask: when does ‘investing’ end and ‘trading’ start?
As equity income managers, our core task is to deliver long-term income and capital growth, so we firmly believe that ‘investment’ is best considered over long timeframes. Holding stocks for longer does not guarantee better returns, but we believe a long-term focus materially improves the odds of success.
A major advantage of focusing on the long term is that it allows us to see the wood from the trees. Companies’ quarterly results are subject to the vagaries of short-term, random events that are well beyond any management team’s control. Yet share prices typically overreact to this type of news flow. Why? It’s human nature. Recency bias is a typical characteristic of decision-making, placing more emphasis and importance on the most immediate information. Further, many fund managers feel pressure, whether through performance incentives or corporate structure, to stay close to benchmarks or peers. Taking a long-term view can lead to periods where performance deviates significantly, a career risk many managers are not willing, nor allowed by their employers, to take.
By focusing on short-term, volatile numbers, most market participants risk missing underlying developments, which may be more significant for a company’s long-term growth or dividend-paying prospects. This creates opportunities for more patient investors. For example, oil companies enjoyed a sharp rebound in profits last year as energy prices spiked following the invasion of Ukraine by Russia. Does it materially change the existential threat to their businesses as the world transitions to renewable energy? We don’t think so.
There is another human factor that matters for long-term success. Among the many reasons behind successful businesses, one is common to all: their culture. It can be intangible and hard to define but is invariably mentioned by the leaders of these companies. For the Swedish industrial company Atlas Copco, for example, it is a culture based on innovation, relentless attention to customers’ needs and empowering local managers. That culture has enabled the company’s successful expansion well beyond its original products, leading to many years of earnings and dividend growth.
The ultimate test of a strong culture is its ability to be maintained after the departure of a charismatic founder or leader. Apple is a good example: its strong culture of innovation and a drive to design sophisticated but easy-to-use devices were instrumental in its success. Most importantly, that culture was maintained after Steve Jobs’ departure, contributing to the company’s enduring success.
We believe culture is a key success factor, and understanding it is crucial for investors. However, generating such insight takes time, and you are unlikely to spend it if your investment time horizon is one year. Over such a short period, a culture change will barely have any impact. Over a decade, however, it could have a profound influence on the success of a company.
Focusing on the long term is hard as it goes against the very human urge to be part of a crowd. Where most see the risks, we seek the potential reward.
Actual Investors
imagine ‘what if?’.
Not ‘what is’.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in May 2023 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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