Billionaire Stan Druckenmiller has one of the best track records in the investment industry. When asked about his investing style, he once said he invests in short-term situations … but with a long-term mindset. How does that work?
What I think Druckenmiller was getting at is that it isn’t the holding period that makes you a long- or short-term investor. It’s how you think about stocks.
If you think of stocks as ticker symbols bobbing around and decide whether to buy or sell based on price movements alone, that’s speculation.
If you recognise that stocks are a part ownership in real businesses, and your buy and sell decisions are based on where the share price is today relative to the company’s intrinsic value, I think you deserve to be called a long-term investor – even if you only own the stock for a few months because the gap between price and value closed quickly.
In hindsight, a decision may be short term if you find a better opportunity – you should strive to have your portfolio invested in the most undervalued stocks at that moment in time. It’s natural that during market panics, such as the Global Financial Crisis, your portfolio will have a high level of turnover as you swap undervalued stocks for extremely undervalued stocks.
But what distinguishes long-term investors is that, before a purchase, they ask themselves whether they would be content to own that company if the stock exchange closed and they could never sell.
If you were going to buy a farm, you wouldn’t be thinking about how much you could sell it for the next day, you would want to know how much wheat it produces and its earnings potential over many years. The same should go for stocks, because the intrinsic value of a business is based on all the cash it’s going to throw off between now and judgement day. The closer you can get your thinking to that of a business owner, the better.
The same rule applies even if you are intentionally investing for the short term. A few years ago, we outlined a way to take advantage of a mispricing in McMillan Shakespeare that we expected would pay off the following month (and did) thanks to a Federal Election. But even though, thanks to a catalyst, we only expected to own the business for a short period, the appropriate way to value the company was still based on the risks and potential earnings we expected over the long term.
As Warren Buffett put it: ‘If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes’. What makes a good long-term investor isn’t that they hold stocks for the long term. It’s that they are focused on valuing businesses, not speculating on price movements.
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