The Long-Term Investor's Quintuple-Edged Sword
I list what I see as the main advantages of long-term investing:
1. Ride the Secular Trend: History tells us that capitalism favors equity investors over bondholders. Going long for the long haul puts capitalism's "wind behind your back."
2. Save on Fees: Long-term investing means less portfolio turnover, consequently lower fees. For example, a 1% (100 b.p.) per annum savings in fees over 30 years produces a very significant difference: $100 at 7% growth gives $761, while 8% growth results in $1006. That's a 32% advantage over 30 years.
3. Defer Taxes: Throw taxes into the mix and the difference widens: Continuing to work the above example, with 20% tax paid every year on 7% profits, $100 grows to $513 after-tax over 30 years; whereas if 20% tax is paid only once at the end of 30 years on the cumulative 8% annual profit compounded over 30 years, $100 would grow to $825 after-tax. That's a 61% advantage over 30 years, approximately half from fess saved and half from the time value of deferring taxes over the years. Bump the tax rate up to 30% and the advantage widens to 75%.
4. Face Less Competition: Financial markets and assets tend to be priced quite competitively, in the sense that when a pack of investors are all looking at buying the same stock or property, the pricing unually ends up being higher than I want to pay. Since the vast majority of institutional and individual investors are bunched up towards the short end with investing horizons of a year or less, those investors with longer term investing horizons have the advantage of facing less competition, which should translate into more attractive deals (viewed from a long-term perspective) both on the way in and on the way out.
5. Exploit Timing Advantages: In our short-term world, thinking long-term provides opportunities to buy stocks and properties cheaply when Mr. Market is pessimistic about future prospects, and to sell at dear prices when Mr. Market becomes irrationally exuberant. Fundamentals (sales, profit margins, earnings, cash flow, etc.) evolve as companies grow, while market prices fluctuate on the whims and emotions of the herd of investors. There are convergence-divergence opportunities in this interplay of long-term fundamentals with short-term price movements.
That sums up the five-fold "edge" that long-term investors have. Good value on the way in and high profit in the way out are available to patient investors with a long-term view who are willing to "think different" (Apple's one-time marketing slogan) from the pack.
1. Ride the Secular Trend: History tells us that capitalism favors equity investors over bondholders. Going long for the long haul puts capitalism's "wind behind your back."
2. Save on Fees: Long-term investing means less portfolio turnover, consequently lower fees. For example, a 1% (100 b.p.) per annum savings in fees over 30 years produces a very significant difference: $100 at 7% growth gives $761, while 8% growth results in $1006. That's a 32% advantage over 30 years.
3. Defer Taxes: Throw taxes into the mix and the difference widens: Continuing to work the above example, with 20% tax paid every year on 7% profits, $100 grows to $513 after-tax over 30 years; whereas if 20% tax is paid only once at the end of 30 years on the cumulative 8% annual profit compounded over 30 years, $100 would grow to $825 after-tax. That's a 61% advantage over 30 years, approximately half from fess saved and half from the time value of deferring taxes over the years. Bump the tax rate up to 30% and the advantage widens to 75%.
4. Face Less Competition: Financial markets and assets tend to be priced quite competitively, in the sense that when a pack of investors are all looking at buying the same stock or property, the pricing unually ends up being higher than I want to pay. Since the vast majority of institutional and individual investors are bunched up towards the short end with investing horizons of a year or less, those investors with longer term investing horizons have the advantage of facing less competition, which should translate into more attractive deals (viewed from a long-term perspective) both on the way in and on the way out.
5. Exploit Timing Advantages: In our short-term world, thinking long-term provides opportunities to buy stocks and properties cheaply when Mr. Market is pessimistic about future prospects, and to sell at dear prices when Mr. Market becomes irrationally exuberant. Fundamentals (sales, profit margins, earnings, cash flow, etc.) evolve as companies grow, while market prices fluctuate on the whims and emotions of the herd of investors. There are convergence-divergence opportunities in this interplay of long-term fundamentals with short-term price movements.
That sums up the five-fold "edge" that long-term investors have. Good value on the way in and high profit in the way out are available to patient investors with a long-term view who are willing to "think different" (Apple's one-time marketing slogan) from the pack.
posted by Lloyd Sakazaki at 8:43 AM
3 Comments:
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I believe that the problem with many stock investors today is their concern with the short term movements of their stocks. Istead of being concerned with buying the right stock at the right time and holding for some time not buy and hold forever' but for a considerable period of time.
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