One of the barriers that prevents investors from acting against bubbles although they are aware of it is myopia; an overt focus on the short term. However this tendency to think short term is inherent in human beings. It is the most distinguishing factor that separates successful people from unsuccessful people. Investors today appear to have a chronic attention deficit hyperactivity disorder (ADHD) when it comes to investing.
In the 1950’s and 60’s investors used to hold stocks for 8 to 10 years. Gradually with the rise of institutional investments this period is shrinking and today it would be around six to nine months. And when you hold a stock for such a small period of time you don’t care at all about the long term. Your focus automatically tend to be on the next couple of quarterly earnings figures. If one is so short sighted there is no way that one would have any fundamental view of investing. We can examine the different drivers of equity returns to see what we need to understand and thus make our investment decisions. But when we are looking at a one year time horizon the vast majority of your total returns come from changes in random fluctuations in price.
However if one were to have a five year time horizon 80% of your total return is generated by the price you pay for the investment plus the growth in the underlying cash flow and profits.Fundamental long term investors understand this and thus are willing to invest for the long term. Once you are sure of your fundamentals and are willing to wait for the long term, the volatility and the shocks of the markets will not scare you. On the contrary investing becomes fun and rewarding.
To quote Keynes observation "Human nature desires quick results, there is a peculiar zest in making money quickly......compared with their predecessors, modern investors concentrate too much on annual, quarterly and even monthly valuations of what they hold, and on capital appreciation."
Regrettably the quarters and months which Keynes alluded have become days and minutes for some investors today.
With a host of investors falling in to this trap of short term focus there exists a great opportunity for long term fundamental value investors. They are in the minority and hence devoid of any competition.What they require is patience and courage to act contrarian to the crowd.
Parag Parikh Flexi Cap Fund believes in the long term concept and hence discourages investors having an investment horizon of less than five years.
Start the new year with a resolution to invest for the long term. You are bound to succeed. Wishing you all a very Happy and a Prosperous New Year.
