Most folks like to fashion themselves a long-term investor. It’s a popular badge of honor—one that projects a certain level of investing wisdom and maturity. However, sadly, a large portion of those who think they’re long-term investors are actually living in a fantasy world! How about you? Are you an actual long-term investor… or just one in name only? In this article, we’re going to examine nine sure-fire signs that you are NOT a long-term investor.
Does it matter? Absolutely! The most effective and consistent path to building wealth and financial independence is through long-term investing (for more, read our article Value Consistently Trumps Growth for Long-Term Investing). But—and it’s a BIG but—simply calling yourself one won’t get the job done… you actually have to be one! Fake it to make it doesn’t apply to investing!
For a simple illustration of this truism, one needs to look no further than the twenty-year period from 1999 to 2018. Long-term investors should have been able to bank annualized returns of 5-9% (or better) over that time. However, as I noted, most retail investors are not long-term investors—they are short-term investors or swing-traders. This resulted in an actual average annualized gain of only 1.9% over that period for retail investors—less than the pace of inflation (meaning they actually lost in real dollars). And that was the average—meaning half of all retail investors did worse!
The juxtaposition couldn’t be starker between those with a proper approach to long-term investing and those without it. So, the question facing you today is: Are you really a long-term investor?
Let’s find out!
The first sign that you’re not a long-term investor is if you find investing exciting.
Let’s be frank—long-term investing is not exciting. It’s akin to watching the grass grow or paint dry! It’s boring… but highly productive.
If you’re looking for excitement, then you have a trading mentality.
Speculation produces excitement. However, long-term trading is not speculative—it is methodical and unemotional. It requires an appropriate mindset and solid process. That doesn’t mean it’s not enjoyable… but there’s a fundamental difference between enjoyable and adrenaline-producing.
Long-term investing is about the consistent, stable accumulation of wealth by capitalizing on value opportunities and leveraging the power of compounding. It’s a game of chess—not basketball! It’s about buying ownership stakes in business—not gaming stock prices.
If you’re churning positions, then you’re not a long-term investor. Your average hold time should be longer than 3 years—preferably longer than 7-10 years (the length of the average business cycle).
Again, speculating on stocks can be exciting… but it’s not the best path to long-run financial success nor is it long-term investing!
The second sign that you’re not a long-term investor is that you are focused on or preoccupied with stock price.
Long-term investing is predicated on value and a focus on the business you own—not recent price action.
When you are focused on price, it indicates a loss-aversion mindset. This is necessary in trading and short-term investing, where managing market (volatility) risk is much more critical. However, it is the wrong mindset for the long-term investor.
You are invested in a business (not a stock) and should be focused on fundamentals and long-term performance. You must be a business analyst—not a price-action technician.
Yes, short-run price movements can provide you with value opportunities to add to a position (i.e., lower your cost basis); however, it is not a vehicle for selecting investments or exiting positions. Long-term investing is about having a fundamental investing thesis—that thesis should drive your decision to enter a position or exit it (when it is no longer valid).
The third sign that you’re not a long-term investor is that you have a flipper mentality.
As opposed to the trading or short-term investing mindset of being loss-averse, long-term investing is all about being sell-averse. Obviously, you can sell—but you only do so for very specific and rare reasons.
If you’re quick to flip stocks… you are not exhibiting a long-run investing mindset.
Again, the focus is on being a business owner. If you own a great business(es)—why would you want to sell it? There’s no benefit to the LT investor for churn for the sake of a quick buck.
The goal is to identify and buy great businesses… and hold them for a very long time—preferably forever. By doing so, you allow those great companies to consistently make you money over time (“compounding” your way to wealth and financial freedom).
Short-run price fluctuations are highly unpredictable and are not a consistent path for reaching your long-run financial goals.
Now, you may be saying to yourself, “but Benjamin Graham advised to sell positions when they become significantly overvalued?”
He was right. When that occurs, you should consider exiting the position and reinvesting that capital in new, undervalued positions. That’s not churn!
However, it is also worth noting that when you hold a great company in your portfolio, its valuation will be fairly correlated with price over the long run. These companies rarely become “significantly” overvalued but, rather, just keep grinding higher over the long-run. They are the investing equivalent of finding a goldmine and hitting the mother lode. When that happens, you hang-on to that claim and mine it for all it’s worth!
This is the Warren Buffett model. You build a portfolio and then prune it over time as positions become significantly overvalued. This will naturally result in a concentrated portfolio of the best of the best, with smaller developmental positions.
Buffett sold his positions in Freddie Mac, Gillette, and The Washington Post when they became significantly overvalued, reinvesting that capital into new developmental positions. However, he has maintained and grown his positions in his best goldmines for decades—such as American Express, Coke, and Wells Fargo. He fully understood their potential for long-run, consistent growth and compounding power.
Please note, the numbers in the above graphic don’t matter—I’m simply trying to model the long-term portfolio building process and mindset:
Remember, you should always be focused on adding developmental positions that have the potential to become great companies over the long-run. Obviously, the reality is that they all won’t—but we don’t know which ones will or will not. Some will need to be pruned, others will grow into core positions in your portfolio. But… you never want to start a developmental position that you don’t feel has the potential to develop!
Patience is the key to long-term investing. You need to provide your developmental positions with time to breath and develop—don’t prune to quickly! Your average time between establishing a position and deciding to prune it should be 3-5 years. If your average churn time is less than three years, then you are not a long-term investor. You’re either (a) pruning to quickly or (b) selecting poor assets for your portfolio in the first place.
Of course, you will also have a consistent flow of new capital flowing in as well.
Finally, once you reach a reasonable number of developmental positions, you will want to maintain that number (adding as you prune) and reinvest new capital internally.
The point is that if you are indiscriminately flipping positions based on short-run performance with little thought or concern for long-run their long-run performance potential, then you are cutting your winners rather than allowing them to cultivate into great ones—and you’re not a long-term investor.
Note: Lots of “long-term” investors cut their positions in Amazon when they achieved a 10x return. They failed to recognize the long-run potential of a great company and forfeited a potential 100x return over the long-run!
The next sign that you are not a long-term investor is that you are not buying companies that offer long-run quality.
If you hear yourself saying, “I know it’s not a great company… But I think this stock will bounce in the next year—the technicals indicate it,” then you are a swing-trader—not a long-term investor.
The stock may or may not be primed for a bounce… but that has nothing to do with the long-run quality of the company.
We enter positions based on long-run potential. That potential requires strong fundamentals. Yes, we want to buy that strength at a discount (value)… but value without quality often equals a value trap.
“Potential” price moves over the short-run do not—in and of themselves—provide us with those quality companies we can mine for decades to come—that requires quality.
If your first concern is price action, then you are speculating on stocks—not investing in businesses. You need to be concerned first and foremost with identifying long-run quality. Then have the patience to wait until you can acquire that quality at a value!
The fifth sign that you are not a long-term investor is that you lack patience with and confidence in the power of compounding.
Compounding is the magic behind wealth creation. It is critical that you truly understand it. If you don’t understand it, you will never have confidence in its ability to work for you or the patience to let it work its magic!
If you find yourself feeling like you have to make your money in the market, then you are likely trading and loosing out on the power of compounding. Instead, you should be confidently and patiently thinking that your businesses will make you money—lots of it over time.
Long-term investors let their money work for them. Traders and short-term investors have to work for their money. It is an active versus passive mentality. Real long-term wealth comes from passively compounding and leveraging other people’s time, effort, and money—not from your own via trying to quickly time the markets successfully and consistently. If you’re having to constantly work for your gains, then you’re not a long-term investor.
If you can’t unplug from the markets for six months or a year, then you might want to reconsider what type of investor you are. You would be surprised how many “long-term” investors feel like they have to monitor the markets (i.e., price action) on a daily, if not hourly, basis.
That’s not long-term investing—it may be exciting (aka speculation), but it’s also churn-producing and predicated on an inability to be patient, to be passive, to trust in your long-run analysis/thesis, and to let the power of compounding unfold!
Finally, if you have to make money now—then you’re not a long-term investor. LT investing is not a get-rich-quick scheme. Compounding takes time and patience. It’s about investing and reinvesting to build future wealth. If you need money now, then that will force you to not only focus on short-run trades and investing flips (aka timing the markets rather than investing time in the markets), but it will force you to liquidate winners—winners that could have provided you with exponentially more return over the long-run had you been able to hold them. You never want to be forced to sell—you want to sell because it makes sense and you chose to.
The next sign that you’re not a long-term investor is that you don’t keep a cash reserve.
Long-term investors always keep some powder dry to capitalize on time-arbitrage opportunities in the markets.
You should always maintain a list of great (quality) companies that you would buy if their market price dips below your intrinsic valuation of them by a certain margin of safety. You can’t do that if you don’t have the cash available—you simply lose out on a great long-run opportunity!
Long-run investors understand that they never know when it will happen for a given company… but over the long-run, it more than likely will! When it does, they’re ready to capitalize on it. That’s the patient and opportunistic mindset of a successful LT investor.
Traders and short-term investors feel like they always need to have their capital in play and “making” money for them. Not only does this lead to missed opportunities but, even worse, it leads to settling for less than optimal investments. The great ones get away, while you settle for low-quality (and therefore short-term) buys—resulting in sub-par returns and needless churn.
It is worth noting that this doesn’t mean there aren’t times to put the pedal down and go all in. After all, Buffett himself has quipped (quite aptly) that “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble!” The takeaway is that great opportunities come infrequently—if you are over-investing (constantly deploying 100% of your capital), then you are likely not investing in great opportunities and won’t be able to put out the bucket when one actually comes around!
The flip side to this is that you do want your money working for you. You don’t want to under-invest and keep too much of your portfolio in cash—it is guaranteed to do nothing but continually depreciate! Find an allocation that works for you—just not 100% invested (always keep at least a little dry powder at the ready).
The seventh sign that you’re not a long-term investor is that you chase “hot” stocks.
Long-term investors don’t buy “hot” anything. Rather, they buy quality businesses when they’re cold—out of favor with the market and at a discount (value).
Being a successful LT investor requires a contrarian mindset. You need to be greedy when others are fearful and fearful when others are greedy. Chasing the “hot” stock de jour is what’s known as herding. It’s the exact opposite of what you should be doing and inevitably leads to buying high and selling low!
This behavior is usually generated by FOMO, lack of investing knowledge, and/or a lack of self-confidence. Regardless of the root cause, it’s a recipe for disaster. To learn more about LT investing pitfalls like herding, I recommend reading my article 4 Perilous Pitfalls to Avoid with Dividend-Growth Investing.
Successful long-term investors:
Develop an investing plan, solid process, and appropriate mindset—and then trust in them, do your own thing, and stick with it! Don’t buy fish from others—learn to fish for yourself. Those who don’t are not long-term investors.
To learn more about the dangers of relying on others for your investing decisions, I encourage you to read my article Dividend-Growth Investing: Why You Should Never Buy a Fish!
The next sign that you’re not a long-term investor is that you don’t develop a diversified portfolio.
Studies have shown that the average retail investor is woefully under-diversified. They tend to bet on a few promising stocks and go all in—putting all their eggs in a few baskets. As we will see, this is highly risky and not an appropriate long-term approach to investing.
There are several types of risk investors need to manage; however, let’s focus on two of the big ones: systemic and specific.
Systemic (or market) risk is the risk of broad market volatility. This risk is priced into the markets, meaning it is a compensated risk. You are paying for discounted future earnings—the discount is your compensation. As systemic risks change (e.g., slowing earnings), the discount factors that risk into the price.
On the other hand, specific (or idiosyncratic) risk is the risk associated with a specific company or industry. This risk is not priced into the markets because it is an unknown—black swan—type of risk. For example, BP’s Deepwater Horizon disaster was a black swan event that was not priced into the stock in advance.
There is little an investor can do to mitigate systemic risk—it is baked-in to the equation. However, market volatility is not as important for the long-term investor. In fact, Fama and French found that there was only a tiny 4% chance of under-performing the risk-free rate (a negative return premium) with equities over a 30-year (long-term) period. Possible… but not very probable.
If you are focused on market volatility, then you’re not a long-term investor.
However, because specific risk is an uncompensated risk, it is critical that long-term investors manage (or mitigate) that risk. Furthermore, Goyal and Santa-Clara (2003) find that specific risk likely represents 80-85% of total investment risk—a finding that supports the Fama and French assertion that a negative return premium over a long time-horizon from market risk alone is highly unlikely.
Thankfully, mitigating idiosyncratic risk can be accomplished fairly easily by proper diversification.
Unfortunately, studies have demonstrated that the “typical investor holds an under-diversified portfolio” (Brockman, Schutte & Yu, 2009)—a fact that explains a large degree of the poor results produced by so-called “long-term” investors over the past few decades!
Long-term investors (a) view market volatility (risk) as an opportunity and (b) mitigate specific risk through diversification.
If you are focused on short-run volatility and ignoring idiosyncratic risk (i.e., not diversifying your portfolio), then you are engaged in short-term speculation—not long-term investing!
Furthermore, diversification also helps mitigate another investing risk—skew risk.
The market represents a distribution of stock returns. However, the market’s distribution is not exactly a normal distribution—it’s positively skewed. Without getting too deep in the weeds of statistics, this means the mean (or average) is greater than the median and the mode—and there is a long right tail.
What does that mean for investors? Because the median and mode fall below the mean:
Thus, if you pick a small number of stocks, you are statistically more likely to select ones that underperform the market’s average return. That’s skew risk.
This graphic is not exactly accurate (the skewed distributions will be slightly lower at their mode and their long tails will be higher. However, it effectively serves the purpose of demonstrating the basics of what a distribution skew looks like.
Here’s how it applies to the market and investing:
This partially explains why the market (viz., S&P 500) produced an average annualized return of 5.6% over the twenty-year period… but the average retail investor managed to significantly underperform with an annualized return of just 1.9%.
While systemic risk (volatility) is less relevant for long-term investors, diversification helps mitigate specific (idiosyncratic) risk and skew risk—which are highly relevant risks.
If you’re not developing a diversified portfolio… you’re not a long-term investor!
To learn more about idiosyncratic risk and properly diversifying your portfolio, I recommend reading my article Idiosyncratic Risk: Is Your Portfolio Really Protected?
The bottom line is this: If you are overly focused on market risk (short-run volatility) and/or not adequately diversifying your portfolio, then you’re not a long-term investor.
The final sign that you’re not a long-term investor is that you lack a well-defined long-term investing plan.
Every investor should have a well-defined investing plan. It’s perfectly fine to break this up into short-term, mid-term, and long-term sections. However, if you are a long-term investor, then it is absolutely paramount that you have a long-term plan!
If your goals and processes are short-term oriented, then so will your investing.
If you’re entirely focused on or worried about your return this month, this year, or even the next 2-3 years, then you’re not a long-term investor.
Long-term investors make well thought out, strategic moves that are predicated on long-term goals and a long-term investing process. I cannot emphasize the term “strategic” enough. Long-term investing requires time. Again, it is like playing chess. You must make subtle moves now, for which the ramifications will not become fully manifest until years—even decades—down the road.
Tactical (short-run) moves are for speculation—long-term investing is all about strategic thinking.
If you’re making quick moves that are focused on a short time-horizon, then you are not a long-term investor.
Furthermore, strategic (long-term) investing requires a unique process—one that is very different from swing-trading or short-term investing. If you find yourself constantly bouncing from one strategy to another, or frequently changing your process, then you are not a long-term investor.
After all, if it takes time to fully evaluate the effectiveness of your process, then how can you make frequent changes over short periods of time? (hint: The answer is you can’t!)
Yes, continuous improvement is important for long-term investing as well. However, due to its strategic nature, this change should be slow and methodical—not predicated on constant knee-jerk reactions to the market or the “newest, greatest thing to hit investing since sliced bread.” Ignore the noise and marketing gimmicks. Avoid succumbing to the dreaded shiny object syndrome. Develop a long-term plan and process… and then consistently stick to it, making adjustments carefully and thoughtfully.
If you (1) don’t have a long-term investing plan and process or (2) aren’t consistently sticking to it, then you’re not a long-term investor.
These days, nearly everyone wants to fancy themselves as a long-term investor. It sounds sophisticated, good, and soothing to the ego. However, many (a great many) who think they’re long-term investors are, in fact, behaving nothing like a real long-term investor.
It’s easy to fool yourself. And doing so can lead to very poor long-run investing results. Unfortunately, by the time many realize the error of their ways, they have squandered a great deal of precious time—time that can never be recovered and that will have long-run consequences on their potential wealth creation moving forward. With compounding, time is far more valuable than money!
So, how do you know if you’re not a long-term investor?
It requires some honest self-examination. I recommend looking for these nine sure-fire signs:
How many of the nine signs do you see in your own investing activities?
It doesn’t matter how many you identify in yourself. What matters is that you’re honest with yourself and identify them. The quicker you do, the faster you can correct the flaws and improve your long-term investing results—and, at the end of the day, that’s what matters!
One of the best strategies for long-term investing is dividend-growth investing. It’s not easy (being a long-term investor never is)—but it is highly effective.
If you’re interested in and/or looking for more insights into dividend-growth investing, then you’re in the right place!
At Wicked Capital, we focus exclusively on helping others become as successful as possible with dividend-growth investing and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!
Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that DGI portfolio with a solid process and winning long-term investing mindset!
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