Focus On The Long-Term

Ian Cassel Blog, Educational, Intelligent Fanatics 20 Comments

The key to unlocking wealth in the stock market is changing your mindset to stop renting stocks and start owning businesses. I find that most investors say they focus on the long-term but very few actually practice it. Focusing on the long term is hard because it is counter to our human nature that craves action and immediate gratification. The truth is that short-term thinking paralyzes your returns. If your goal is to achieve maximum capital gains, then your intention with every purchase should be to hold for years.

Look at Warren Buffett’s holding period compared to the average US investor:

When we look at the greatest investors of all time with the longest track records, most are long-term investors:

Many try to misrepresent buy and hold investing as buy and forget. Nothing can be further from the truth. The best long-term investors conduct constant maintenance due diligence to reinforce their long-term investment thesis. Their edge in investing is finding great companies early and knowing them better than most. This deep understanding of what they own gives them the conviction to hold and the ability to sell before the masses.

You will have an edge on most investors if you make investments based on expected 3-5 year returns instead of 12-month returns. 95% of investors are investing for the next quarter or two, not the next few years. If you can train yourself to think in multi-year time horizons it frees your mind to think more clearly. Investing is one of the only art forms where opportunities and decisions become clearer when you look out further. There is a high degree of farsightedness in successful investing.

Short-term thinking is a disease and the best way to kill it is focusing on great companies and setting a high bar/hurdle. Great companies at good prices don’t come around very often. For me a great mental hurdle is limiting my investments to those I think will increase 500% in three years if I’m right and increase 100% if I’m wrong. Wait for your pitch. When I look at the 12,000 microcaps that exist on North American exchanges, I own 5 and follow 25 others closely. In the last four years I’ve swung the bat 7-8 times. In the last 21 months I haven’t swung the bat at all. If you set a high bar often times your biggest risk is boredom. When you concentrate on your best ideas you can devote the time to knowing them better than most. To achieve a multi-bagger in the portfolio, you have to hold a multi-bagger. Don’t bother finding the next multi-bagger if you aren’t going to develop the conviction to hold them. Only after you hold onto a great company as the stock goes up 5-10-20x+ do you realize how wealth is truly created.

During earnings season I judge my positions quarterly progress against my 3-5 year expectations. I use a range of 3-5 years because some businesses I can form a reasonable five year expectation and others three years. The 3-5 year expectation is derived from doing countless hours of quantitative and qualitative analysis. If the quarterly result fits within a spectrum or range that keeps your 3-5 expectations on track, then you are good to go. If the quarterly result impacts your 3-5 year expectation you need to dig further. Even though I haven’t swung the bat at any new pitches in 21 months, I have sold two positions because they broke from my long-term expectations, and I redeployed that capital into two other existing positions that are performing. I want to be invested in the best companies I can find at all times. This can be three, five, eight positions, etc. The market and company execution will decide this for me.

David Rolfe, CIO of Wedgewood Partners, manages approximately $6 billion in assets under management. In this great interview he talks about focusing on great businesses and how Wedgewood only swung the bat once in 2014.

If you want to be a better long-term investor get rid of all distractions that promote short-term thinking. Listening to financial pundits, watching your positions every second of the trading day, and watching hundreds of other stocks that you would never own at any price are big distractions. Focus on owning the best companies you can find. You will be amazed at how well you can focus by getting rid of these distractions. Don’t let the daily price action in your positions influence your long-term resolve. For me, this is also why I don’t swing trade a portion of my position. It promotes short-term thinking. It’s hard to be a long-term investor when you watch your stocks every second. Retraining your mind to not care if a position is making a 52-week high or is down 10% in a day will make you a better investor. Similarly, who cares how many Apple iPhones were sold this quarter, or that the ISM Manufacturing Index hit 53, or that the Jobs Report last Friday was weak. Does any of this impact any of the great companies you own? No, not if they are great. You know you are doing it right when your wife is telling you about what happened in the market at dinner.

A long-term focus is imperative to successful investing, and it’s equally important that the management/CEO’s you invest in share this quality. Warren Buffett said, “I am a better investor because I am a businessman and a better businessman because I am an investor.” Great investors and great businessman (aka intelligent fanatics) focus on the long-term.

If you were to analyze intelligent fanatic CEO’s of today and yesteryear like Warren Buffett, Henry Singleton, Phil Knight, Elon Musk, Steve Jobs, Howard Schultz, Bill Gates, Jeff Bezos and others, what sets them apart is their extreme focus, energy, and intelligence combined with an iconoclastic and long-term vision.

Intelligent fanatics have no interest in attracting investors that don’t’ share their long-term vision. In 1997, when Amazon.com went public, CEO Jeff Bezos devoted most of his Shareholders Letter to “It’s All About The Long Term”. You will find similar things said by Howard Schultz in his first shareholder letter after going public in 1993.

We try, through our policies, performance, and communications, to attract new shareholders who understand our operations, share our time horizons, and measure us as we measure ourselves. If we can continue to attract this sort of shareholder – and, just as important, can continue to be uninteresting to those with short-term or unrealistic expectations – Berkshire shares should consistently sell at prices reasonably related to business value.Warren Buffett, BRK Letter 1988
When I evaluate my past and present multi-bagger CEO’s they too have this same long-term focus in common. They were/are not interested in attracting short-term focused investors. Very few, if any, provided guidance of any kind. All guidance does is reinforce short-term thinking. No guidance requires investors to come to their own assumptions and expectations. It attracts a shareholder that is willing to dig deep to understand the business that they own. The short-term focused lazy investor will be quick to complain and say a lack of guidance is a reflection of management’s lack of understanding of the business. But lets see what Warren Buffett says about guidance.
“Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers). Charlie and I not only don’t know today what our businesses will earn next year – we don’t even know what they will earn next quarter. We are suspicious of those CEO’s who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.”Warren Buffett, BRK Letter 2002
Intelligent fanatics long-term focus isn’t just hyperbole. It is a competitive edge in their businesses, just like it is in investing.
“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people,” Bezos told Wired in 2011. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.”
As investors we want to find great companies early and develop the conviction to hold them. How can we find the next Elon Musk or Howard Schultz? It’s great to read about them after they’ve made other investors billions, but we want to find them early in their careers. I want to find Reed Hastings 12 years ago when he was leading an $80 million market cap microcap called Netflix (NFLX). A dominant character trait of intelligent fanatics is their ability to focus on the long-term while repelling short-term thinking within their organizations. As investors the way we find them early is to start thinking like them.

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Comments 20

  1. Yes, focus on the long term. Yes, be patient.

    The question I struggle to come to terms with: Patient with what?

    I once read a study that indicated that over the long term all of the return in the stock market is attributable to 25% of stocks. Over the long term, 75% of all stocks either lose money or break even.

    And in terms of patience, patience when invested, or patience when in cash and waiting, waiting for the fat pitch. Obviously both. Obviously both, but the question is when. Or maybe when which.

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      Rod, thanks for the comment.

      I think it’s both. You really need to wait for fat pitches. This doesn’t necessarily mean you aren’t invested while you wait. You are simply looking for opportunities that are materially better than what you already own. http://microcapclub.com/2015/04/when-diversification-dilutes-returns/

      You want to be patient and let your winners run. Don’t be active for activity sake. When a company performs, and the story hasn’t changed, stop trying to change it. Enjoy the ride. Most of the gurus (Buffett, Graham), a bulk of their gains ever their careers came/have come from a few investments. The key is to find those great investments and be patient. Try not to be like a bee flying from flower to flower. A good goal is to make as few investment decisions as possible.

      1. Waiting for a fat pitch works great if what you are already invested in retains its value. That is crucial — simple in concept, difficult in execution.

        What I took away from the David Rolfe portion, which I really appreciated, and from what I know of your investment strategy to the extent I’m aware of it Ian, is that both are simple, at least in concept. We’re engaged in a difficult, complicated endeavor (investing), in which failure is very possible, even likely.

        Your suggestion of developing a strategy that relies on few decisions dramatically increases your odds, and Rolfe’s, of long term success. Obviously there’s a difficult requirement involved — self-discipline and confronting one’s own counter-productive tendencies. Chief among them, particularly in my case, is a confidence in one’s own judgment not justified by the facts. The purpose of an investment strategy is to help us counteract our own poor judgment.

        While Buffett’s portfolio IS relatively stable, with over half of his total positions carried long term, mostly for decades, he does trade in and out of a portion (about a third) of his portfolio:

        http://seekingalpha.com/article/3442306-tracking-warren-buffetts-berkshire-hathaway-portfolio-q2-2015-update?ifp=0

        I note that in the depths of the Great Recession, he did sell major positions (Johnson & Johnson , Procter & Gamble , and Conoco — Conoco at a major loss)to take advantage of opportunities in Goldman Sachs, GE and Wrigley while also maintaining a substantial cash position, ie the approach you are suggesting — ie maintain long term positions until something better comes along. But I’ve also see investors lose half their money during a market decline, and then be too demoralized, and concerned about maintaining their lifestyle, to capitalize on the investment opportunities of a lifetime. Buffett is taking mostly long term positions in liquid companies with minimal debt and above average long term returns, and above average increases in dividend yield. Each one of those characteristics gives him a modest advantage, adding up to a huge advantage over decades.

        Finally, I don’t get the chart — it seems really interesting — ie Buffett has the best long term track record of the group in terms of total investment returns while having a below average excess return (about half of the average in the exceptional group) — if true is quite likely the result of compounding. The problem with the chart is it seems to suggest, if I understand it, that Munger, Rogers, Druckenmiller, Greenblatt etc have been investing for less than 20 years, which is not correct, I think. Rogers for instance began investing other people’s money in 1970 and co-founded the Quantum fund in 1973 with George Soros, forty odd years ago. George Soros is shown as having been an investment manager for 33 years or something like that. Munger started an investment management business in 1962. I may just not be reading the chart correctly, but I suspect that it does have something important to contribute.

        I appreciate you identifying and exploring your take on the issues that are at the center of successful investing. Any investor who either doesn’t have a strategy (or has one and doesn’t follow it) that deals with the issues you raise in a logical way, is very unlikely to succeed.

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          Many in finance like to sound smart by making things complex. These people usually work for other people. Successful people simplify things. It’s never as simple in practice because most of our human nature drives us to do the wrong thing at the wrong time. The most important investing lessons are only taught during bear markets. My investment philosophy certainly isn’t right for everyone. Everyone is a bit different. My narrow understanding based on my limited investing experiences certainly isn’t representative of “the way it is and the way it should be”.

          Similarly I can’t be Warren Buffett either. I study him greatly because he’s the most successful investor ever, but it’s foolish to think I can copy him or his abilities. I see him more as mentor. It’s impossible to copy him (there is only one), but you can learn how he thinks. I’d like to think that the way I invest today is somewhat similar to how he would have invested in the 1950’s (small capital base) if he would have had a focus on quality businesses instead of cigarbutts.

          “ie maintain long term positions until something better comes along.”

          You summed up my philosophy pretty well. I try to hold the best companies I can find until I find something better. Even though I rarely focus on the macro economy, what I find naturally happens during the tail end (extended bullish cycle) is I get even more concentrated into my very best illiquid ideas. This is very counter intuitive, but as you and I have talked about before, if you can find illiquid, no debt, high growth, profitable companies that don’t have to raise money that aren’t owned by any institutions they do well in any market environment. The problem is there aren’t many companies that fit this “qualification” in extended bull markets. I don’t know….. maybe 10-20 of them total out of 10,000. I certainly don’t know them all or own them all and that is why MicroCapClub exists. All I know is I don’t want to be in any liquid microcaps during a down turn. They get absolutely obliterated as investors take risk off and sell microcap funds and indexes. These investors can’t sell what they don’t own, so I pile into the few illiquid great companies that I feel I know better than most.

          For anyone reading this comment, Rod whom I’m replying to is one of the most interesting investors I know. If you don’t believe me read his bio and article he wrote:
          http://microcapclub.com/2015/05/i-passed-on-berkshire-hathaway-at-97-per-share/

          I’m honored Rod even cares what I think about investing.

  2. This was a very good article. I especially liked the part about not swing trading because it promotes short-term thinking.

    I would actually say it’s even worse than that — it’s not just that it promotes short-term thinking, it actually doesn’t even work IMO. So many investors seem to think that you can use short-term strategies to augment a long-term one, it’s like getting the best of both worlds! But if those people were a) actually making solid long-term picks, and b) did a serious analysis over a period of multiple years, I’m certain that they would almost universally find that the short-term strategies actually directly robbed them of long-term returns (essentially selling things that seemed “overbought” and then never being able to get back in, or buying them back 50% higher). The short-term and long-term are simply two masters that can’t be served at the same time.

    What amazes me most though is how common these swing trading strategies are, and the fact that you’ll almost never hear anyone criticize them as counter-productive. I suspect 50% of “long-term” investors will openly admit to “trading around their core positions”, and another 45% do it but won’t admit to it in public. It’s just so tantalizing, makes you feel productive, and it will take you a few years to even realize how much value you’ve destroyed, if you even bother to do the analysis at all.

    I’ve always thought the whole swing trading overlay mindset is like having 2 or 3 mistresses on the side for some extra excitement and thinking that it’s not going to affect your marriage to your wife in any way.

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      I believe most do it to try to produce some income, but the distraction and short term effect it has on your mindset isn’t worth it in the long run. In most cases your better off spending that extra time doing due diligence or God forbid going out and living life. IMO.

      1. Perhaps this is a useful case study. I recently invested one sixth of my savings into a very small security company. I had studied the financials in detail and satisfied myself that the overall quality of the company was not too bad. Based on the cheap valuation, I was seeking a 100% return.

        The stock proceeded to rally by 50%, despite the absence of any material new information being released to the market. However, a major results announcement was due shortly.

        This left me with a classic dilemma – whether or not to “sell the news”. I felt that the share price continued to undervalue the company, but the position size was now over 25% of my portfolio. I had never gone much above 20% with an individual company before.

        In the end, I decided to sell a third of the position. It struck a balance between helping me to sleep at night without worrying about the company’s forthcoming results announcement, while simultaneously staying on track to achieve most of the gains if the stock eventually reached my target price.

        This strategy of trimming positions on strength, depending on conditions, appears at first glance to be a reasonable one. It seems to boil down to two simple questions:

        1) Is the discount versus target value still large? (or at least not small, in comparison to other opportunities!)
        2) Is the position small enough to enable me to sleep at night?

        It’s obviously more art than science, but if the answer to both of these questions is an emphatic “yes”, then I may continue buying. But if not, then I should do nothing. Or if one of the answers is an emphatic “no”, then I should sell some or all of it.

        Perhaps I can remedy my sleeping problem by focusing more on the company’s products and competitive position, the quality factors, rather than spending most of my time on the financials. In other words, just get to know the company better, so that one-time financial results can’t change my valuation too much.

        Thanks for the amazing website.

        PS: What happened to the security company? They announced excellent results, and claimed a high level of confidence in their long-term future, but admitted to a poor 12-month outlook. And the shares collapsed back to my original entry price. I am now thinking about repurchasing the portion I sold prior to this announcement.

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          Thanks for the comment Graham and sharing your experience.

          I believe that an philosophy/strategy is forged over time and is a combination of our experiences and personality. Your story is a great example of this.

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    2. Agreed! This is incredibly simple advise but so hard for so many to put in practice. I’d venture that especially now, as the markets have been getting choppy, a lot of investors have been in and out of numerous positions trying to find the next shinny “stock”.

      Focus on the business!

  3. When somebody is already multiplied and holding for long with good understanding, then he knows better the deserved price, and IMO, can swing once in a while to benefit. At least with part of the holding, if not full…

  4. Another masterpiece by you, Ian! Keep a long-term focus, ignore short-term tendencies… I started employing your strategy 3 yrs back after reading several of your posts and since then have been seeing a steady double digit growth irrespective of the market behavior. Actually I noticed this strategy works well in one’s personal life as well 😉 Thank you for sharing your experience regularly and helping your investment friends!

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      Thanks Thondai. In a perfect world it would be great to go out seven years since that is a duration of many market cycles, but it’s hard to go out past 5 years. Especially with microcaps.

  5. Thank you for your new post in short time. One of the best read this year. Worth following all time regardless of markets.

  6. Fantastic. Agree 100%. I’m glad that 95% of investors are short-term traders because that just means there are more opportunities for ourselves. I know traders, technicians, momentum, algorithim, IBD-O’Neil types that swear by their methods, but I’m just fine with what you described.

    As for Buffett, I’ve noticed that when he talks about never selling, he mostly refers to his wholly owned businesses. Except for his core stock holdings, he does buy and sell stocks per his 13Fs (something Combs and Weschler do for him mostly now).

    For example, he has sold ExxonMobil and ConocoPhillips. On CNBC, he said he still thinks XOM is a “good” company, but he thinks he can do better elsewhere. I like it as a “bond” with upside in 5-10 years, so I will continue to hold it. Remember PetroChina: he made 5x-6x in 4 years and then sold it “due to price” per his interview with Liz Claman at the time. So some things aren’t forever.

    But I agree with you. And I think this line of yours should be framed on the wall: “To achieve a multi-bagger in the portfolio, you have to hold a multi-bagger.” Amen.

    All the best,

    A.

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      Thanks Anthony. I find that many like to make things harder than they really are to substantiate their own intellect, education, or job.

      Agreed on Buffett. I’m sure in some ways buying whole businesses is easier for him.

  7. Great take on Mr. Buffett. I cannot begin to say how much I have learned from simply listening to him talk and his common sense approach to investing.

    On the long drive home yesterday from dropping my son off at his first year of college, there was a lot of time for reflection. In addition, I’m also close to crossing the finish line on what will end up being a four year investment (initiated as investment/management, turned to management/investment, then back to investment) – and I realized that while my style of investing will never allow me to attain a net worth anywhere near Mr. Buffett, I definitely owe a lot of my style of investing (and success) to Mr. Buffett.

    Following Mr. Buffett during my formative investing years was invaluable. I even have a “thanks, but no thanks” rejection letter signed by Mr. Buffett regarding an investment opportunity I submitted to him, that I am actually quite proud of…. lol

    Thanks for the commentary. I really don’t think the businessman/investor angle does not get enough coverage.

    Regards,
    John

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