Are you a patient investor? Or are you looking at your portfolio multiple times a day, having the itch to sell everything? Despite having done DIY investing for over a decade and making my shares of investment mistakes in the past, I am still learning about investing on a daily basis.
One key lesson I’ve learned is short-termism will hurt your investment. As investors, we need to have patience and a long term view.
What is short-termism?
Per Wikipedia, short-termism is giving priority to immediate profit, quickly executed projects and short-term results, over long term results and far-seeing action.
On the surface, it seems that short-termism is associated with investment strategies like day trading, momentum trading, short selling, and options trading. However, I believe many investors that invest in individual dividend stocks and passive index ETFs often fall into the short-termism trap as well.
How so?
On one hand, it’s about short-term profit taking. On the other hand, it’s about paying too much attention to the short-term share price movement and feeling the need to tweak your investment portfolio. Some common portfolio management questions I’ve seen on Facebook and Twitter are:
“Should I take profits when the stock goes up and re-invest the money later? Give me a reason why I shouldn’t sell and should just hold?”
“I purchased Royal Bank at $110. It’s frustrating seeing the share price going up to $150 and then dropping back down to $125. Should I sell when the stock is at a 52-week high and buy back when the stock price dips?”
“I have a small paper loss on Brookfield Asset Management, I don’t think the company is doing well, should I sell and invest the money elsewhere?”
“I bought some Apple shares recently. Apple had a terrible quarter and I’m down. I’m convinced that Apple is going to crash and burn. Should I sell and run now?”
And the questions go on and on…
Why do we fall into the short-termism trap?
There are many reasons why we fall into the short-termism trap. Some of the common reasons I believe are:
- The need to be correct – we as investors want to see our investments increase in value once we make the purchase. When this happens, it means we’re right and made the correct investment decision. If the share price goes down, that must mean we are wrong and are terrible at investing. The need to be correct becomes a burning desire. Nobody wants to be told that they are wrong and be the laughingstock.
- The need to be validated – we all have the need to be validated by others but for some reason, this need is even stronger when it comes to investing. We want others to validate that we made the right investment decision so we can feel good inside. The desire to be validated can be like drugs, once someone validates you, you begin to want even more. The need to be validated is a very slippery slope…
- Looking for gains right away – It’s exciting to see investment gains. It is even more exuberating to see significant gains in a few days. It’s like going to the casino and winning 1000 times on your bet or winning the lottery. Why wait for five years to see multi-bagger gains when you can get the same type of gains in a week? Long-term investing is for losers!
- Ego – for some reason we all believe we are better investors than who we truly are. Believe me, I fall into this trap from time to time. Deep inside, we believe that we can predict how companies will do in the future accurately by looking at past performance and public information.
How to escape the short-termism trap?
So how do we escape the short-termism trap? I think the best method is to understand your short-term, medium-term, and long-term goals. Are you investing for the short-term or are you investing for the long-term? Knowing this will dictate what kind of investments you should buy.
If you need money in the short-term, you shouldn’t be in the stock market. Instead, you should focus on more conservative investments like GICs, bonds, or money market funds. If you’re investing for the long-term and don’t need the money for the next 10 years or more, focus on investing in well-run profitable companies, or broad market passive index ETFs.
We also need to forget the notion that we can predict the exact highs and lows of the stock market. Since nobody can accurately predict the exact highs and lows, there’s simply no way to buy and sell stocks or ETFs at these exact points. Instead of quibbling on eighths and quarters and losing sleep on it, pat yourself on the back for getting started with investing. Remember, the best time to invest was yesterday which makes today the second best time to start investing.
Don’t forget that the stock market has returned about 10% per year over the last century. Remember, that’s the average return over a long time. If we look at the individual yearly returns, some years the stock market can be down over 25%, and some years the stock market can be up over 25%. If you keep jumping in and out of the market, you may always end up on the losing end. You will certainly not get that average 10% return.
As someone told me once – “When it comes to investing, your ego is not your amigo.” It’s OK to make mistakes and learn from them. There’s no need to boast about how well you are doing with your investments. Be humble. Know that you will always have the best interest for your money, not somebody else.
Now going back to the questions from above…
Q1. Should I take profits when the stock goes up and re-invest the money later? Give me a reason why I shouldn’t sell and should just hold?
A1. This totally depends on your investment goals and investment timeline. Are you in need of the money right away? Or are you investing for the next 10 years or more? If you keep doing the buy-sell-buy-sell cycle, it will be nearly impossible to get these multi-bagger returns.
So a few things to potentially consider if you really want to take a profit
- Sell 50% of the investment, take the profit and re-invest the money elsewhere.
- Sell enough shares to recoup your cost basis and ride with the rest
For the most part, we have refrained from doing these two above things. What we’ve been doing is reinvesting with new cash and either average up or down our cost basis.
Now, many people would say that cost averaging down is always preferred. However, as a total return investor (i.e. dividends & share price appreciation), I am far happier to cost average up.
Why? Because that means the stock has been doing well!
Q2. I purchased Royal Bank at $110. It’s frustrating seeing the share price going up to $150 and then dropping back down to $125. Should I sell when the stock is at a 52-week high and buy back when the stock price dips?
A2. How do you know for sure that when the stock price is at a 52-week high it won’t continue to go higher? On the flip side, when the stock price dips and gets to a 52-week low, how do you know with certainty that the stock price won’t go lower? Why put this unnecessary pressure and worry on yourself when it is far easier to just hold the stock or ETF and collect dividends/distributions?
Q3. I have a small paper loss on Brookfield Asset Management, I don’t think the company is doing well, should I sell and invest the money elsewhere?”
A3. When it comes to investing in individual stocks, I believe it is important to have an investment thesis. What are your top three reasons for investing in this particular stock? Whenever you are considering selling the company, ask yourself, was your investment thesis incorrect? Has the company fundamentally changed such that your investment thesis no longer holds true?
Q4. I bought some Apple shares recently. Apple had a terrible quarter and I’m down. I’m convinced that Apple is going to crash and burn. Should I sell and run now?
A4. Do you work at Apple and can get a hold of their P&L statement? If not, how did you come up to the conclusion that Apple is going to crash and burn? Are you being curious and asking yourself questions about Apple?
Summary – Is short-termism hurting your investment?
If you find yourself constantly checking your investment portfolio and wondering if you should sell your investment, please do yourself a favour and stop. Short-termism will definitely hurt you in this case.
Always understand your short-term, medium-term, and long-term goals as well as your investment timeline. Use them to help you develop your core investment strategy.
Most importantly, remember that time in the market is far more important than timing the market.
Your picture looks like Page, Arizona. Nice shot.
I have mixed feelings on the concept of “short-termism”. I have transferred most of my GIC’s to stocks over the past 14 months. I have no experience in the stock market except back in the 80’s where I lost a fair amount with a major Montreal brokerage firm that provided poor advice.
The best advice I have taken during the past 14 months is setting guidelines and research the investments well as you have stated. A key guideline of mine is simple if the stock looks good–(1) don’t buy the stock unless it is within 10-15% of its low (with few exceptions to 25%). I was buying too high and this year was very bouncy regarding stock prices. (2) Invest time in monitoring changes in individual stock holdings. It’s been a difficult time for all of them. (3) Hang in there and look for patterns from previous bounces. My Ponzi stocks (split stocks) bounced but are providing 4%-24% returns in spite of missing some dividends. (4) I monitor how much “new” money I have added to the market since the beginning. Otherwise there is really no way to determine real profits. (5) Only 3 out of about 50 stocks in my portfolio cost more than $20/share. 14 are less than $6/share. I have found price does not indicate quality. (6) The portfolio is 95% Canadian. (7) 90% produce dividends — I no longer consider stocks with dividends less than 6% unless it is associated with new research or a university research program. (8) Keep an open mind with what is coming/here — satellites, drones, computer and physical security requirements (see SECU for example) and of course electric cars and new mining techniques that are much greener; solar and windmills and those who construct them; it keeps the research interesting. My dividends are projected to be 7-8% for the total portfolio plus (compounding from dividends reinvested in 2023). I have recovered all losses from the portfolio as of this week (they were down nearly 30% in September). I find the whole process exciting and informative. I like a good challenge. Thank you for your information and opinions over the year Bob. They have helped me form my guidelines.
Those are great guidelines. It’s important to create these as part of your investment strategy. 🙂