In a recent post, we talked about the pessimism bias. Pessimists tend to look at the markets with a short-term view. They feel vindicated by a 10% drop, even if the market is still up 20% on the year. But the most successful investors take a long-term view. A 10% drop is just a temporary disappointment.

You might hear people say things like, “the real edge in the markets is having the right psychology.” No. The real edge comes in trading against these people. They don’t understand that without a real advantage, being the most serene Zen master won’t help at all. You will just serenely lose money.

Long-term equity investors have a real edge. For as long as we have data, equities have tended to go up. Nonetheless, patience is still a huge help to investors. In the working paper, “Investing for the Long Run” that first appeared in 2011, Andrew Ang and Knut Kjaer give advice on how to maximize this advantage and some traps to avoid.

They define long-term investors as those with no short-term liabilities or demands for liquidity. There is a lesson just in this definition. In order to really gain from the market’s long-term behavior, we need to always be able to stay in our positions. Further, in times of stress we ideally want to be able to add to positions. The stress of others can be profitable for us. The ability to always trade is a very important option to own.

The advantages of being long term investors are:

• Being able to ride out short term volatility.
• Being able to exploit short term mispricing.
• Being paid to take on illiquidity risk.

The biggest mistakes are:

• Chasing recent returns instead of rebalancing to a fixed allocation.
• Paying advisors who have incentives to generate short-term profits.

Long term investors need to:

• Rebalance to fixed exposures.
• Minimize advisor fees.
• Accept illiquidity risk but only when the return is sufficient.

If you invest in equities, you have already done the hardest part. You have made the good bet that equities will perform as they have in the past and go up. Now just let time take over. As one of our traders says, “Never ruin a good buy with a bad sale.”

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.