Two Types of Investors
Within the realm of investing, two distinct archetypes emerge: the Short-Term investors and their counterparts, the Long-Term investors.
With the sun's first rays, short-term investors spring into action, engaging in a dance with the market. These nimble traders orchestrate quickfire transactions, leveraging their foresight into the market's immediate trajectory. A significant number of them call the bustling streets of Manhattan, near Wall Street, their home. This strategic proximity ensures that when they tap the coveted 'trade' button, their orders cascade onto the trading floor in a heartbeat before their peers. In contemporary times, automation has taken the reins, with computer algorithms choreographing and executing trades independently, following the intricate patterns that traders meticulously encode.
Despite the technology and speed, short-term traders face odds little better than 50/50. We expect that they experience heightened stress levels, and many resort to excessive drinking. Those who are successful are brash, brave, and braggadocious - few things squash humility like getting rich quickly!
For those who don't achieve success, an inevitable crossroads awaits — a fate that befalls the majority of short-term investors. Similarly, those who opt to navigate the realm of options trading from the comfort of their homes often encounter a parallel destiny.
The Case for Long Term Investing
Mrs. Hamilton, my seventh grade math teacher, taught us the law of large numbers. If you flip a coin ten times, you might get five heads and five tails - the expected result. But you often might get eight heads or seven tails - an unexpected result.
However, if you flip a coin ten thousand times, you will come out with a number very, very close to five thousand heads. You will not reach an unexpected result, because the numbers will eventually revert to the expected result: half heads and half tails. This is the Law of Large Numbers - learned in seventh grade with sore thumbs and forefingers.
In Las Vegas, the odds are 10-20% against you. If you sit at a Blackjack table for an hour, can you absolutely take the Casino to the woodshed, making a tremendous profit? Absolutely! And it is thrilling- a night you will remember forever.
You'll probably remember it due to its rarity, as the law of large numbers asserts that the more you engage in gambling, the more inevitable your losses become, given the unfavorable odds. When you tally up the collective sum of your casino-related ventures throughout your life, it's likely a substantial amount of money will have been lost, perhaps with a handful of cherished memories to offset it. It's this reality that prompts Las Vegas to promptly eject cheaters and card counters; the casinos simply cannot afford to let the odds, and subsequently the law of large numbers, turn against them.
What’s that have to do with the Stock Market?
Over the last century, the value of stocks has increased by an average of over 9% per year. As a Long Term Investor, the odds are in your favor! Because of compounding - the fact that the new dollars that you earn begin earning money as well - that 9% growth means your money could double every eight years. The odds are in your favor and - you are in the casino’s seat.
Einstein is reported to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it."
Does that mean you will never have a bad month or a bad year in the stock market? Absolutely not. Even the Casino lost money that one hot night you had at the Blackjack table. The stock market goes down roughly one year of every four. It does somewhat better than tread water two years out of four. But that fourth year is magical - and if you are out of the market that year because you are scared of those other three years - you will miss the gains.
How do you know when that fourth year is coming? We can’t know.
And how can we avoid the losing year? We can’t.
You can try listening to the many people who loudly make predictions. They have an incentive to make bold and outlandish predictions. After all, the media is paid only to get our attention - not to inform us. If their prediction is not bold and outlandish - no-one will listen. If it is bold and outlandish, and they are wrong - no-one will remember. If it is bold and outlandish and correct, they will become fabulously wealthy.
Nouriel Roubini predicted the 2007-2008 financial crisis and earned the nickname “Dr. Doom” when it turned out he was right. He has been predicting further catastrophe’s ever since, including this year. He predicted a long and ugly global recession to start at the end of 2022, to last all of 2023. Wrong again - at least so far.
Mr. Roubini is a brilliant professor from New York University - if he is wrong more often than he is right, who do you listen to? Many economists believe we cannot meet our historical 9% average growth rate in the stock market in the future as we have already invented everything that can be of significance. On the other hand, others will point to an economy that is changing far more quickly than ever with technological evolution, cancer triumphs, driverless cars, and the promise - and threat - of AI.
As long as you remember a few collected philosophies of successful Long-Term Investors, you will come out a winner, no matter who is right.
The Philosophies of Long-Term Investment
Be a Long-Term investor. Understand that the odds can be in your favor with a disciplined investment approach. Understand what you are invested in and why. Understand what the crowd is investing in… and beware.
Learn and listen to history. History does repeat itself, but rarely in the same way.
Be a mindful investor. Be humble about your wins, understand your mistakes. A mistake denied is a lesson not learned.
Knowledge is overrated. Wisdom is underrated.
Always question what you are certain of. Ralph Waldo Emerson said, “Everyone I meet is my master in some point, and in that I learn of him.” Ask questions always, actively listen to the answers, and alter your opinion if necessary.
"Spend less than you make and always be saving something. 'Contented poverty is an honorable estate. It is not the man who has too little, but the man who craves more that is poor.' - Epicurus.
Long term investing is not certain because it takes time and it takes persistence. It will cause us to learn to live with doubt and embrace uncertainty.
I have heard it said that Novak Djokovic is one of the greatest tennis players ever because of his ’Tolerance for Tedium’ - his continued drilling, drilling, drilling the basics of tennis. As you patiently practice the philosophies of long term investment, and you finally achieve financial independence, you will truly appreciate the value of money because of the sacrifices you have made.
Inspired by a reading of
The Joys of Compounding - The Passionate Pursuit of Lifelong Learning by Gautam Baid
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The views stated here are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.