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Long Term Investing

We all know that investing should be for the long term, but human nature compels us to watch our investments like a hawk. We sit trawling the internet, and listen to TV and radio pundits, trying to eke out any bit of ?information? that will help us to make better decisions. Very often this leads to destruction of capital through excessive trading.

A solid investment strategy involves purchasing a company (that has good prospects) when there is a margin of safety. Part of the investment process is in understanding that the company?s share price requires time to go from being undervalued to having the value realised. If you have done your research properly then you should know what the company?s true value is, and ideally there should be a large gap between the purchase price and true value.

If your portfolio is composed as mentioned above, then all the news flow should do (if it has any effect at all) is slightly alter your idea of true value. An example is buying a company at R30, believing that true value is actually R50, and then waiting for true value to be reached (one can also often hang on for a bit longer and only sell above true value). News items along the way will affect the true value. If earnings are stronger than expected, or the dividend payout is larger than anticipated, then true value may rise to R60, with share price moving up to R45. Bad news may push true value back down to R55, while the price falls to R35. Prices often fluctuate more than value, and you need to be aware of this when investing.

In this example the ?investor? who buys on the news flow (buying when good, and selling when bad) will buy at R45 and sell at R35, while the investor who has done their research, and buys on the back of solid fundamentals will have bought in at R30, and then held through the good and bad news. As long as the investor believes that true value is higher than actual price, and that the true value is attractive relative to other investment opportunities, then the share should be held.

This is obviously a very simplistic look at investing, and it is never this easy, but by being patient (and waiting for good investments to come around) you will be able to make better investments that you can hold onto for longer.

The benefits of holding onto an investment include:

Gains being classified as capital gains, as opposed to income gains, if the investment is held for more than 3 years.

A reduction in transaction costs (each transaction triggers fees that detract from performance. More transactions results in a larger performance drag).

Making fewer mistakes. Importantly by making fewer decisions you will be able to cut down on your mistakes. We are all human, and mistakes are inevitable, but if you wait until you have a high conviction in a share, you will be less likely to make a mistake than if you invest your capital at any fleeting opportunity.

In a world where instant gratification is sought after, we need to remember that those who sit back and channel out the noise are the ones who will be successful over the long run. And long term satisfaction is far more rewarding than short term pleasure.

While it can be tough on your character, investing for the long term has been proven to add value.