Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 94

Why long term investing is not easy

The benefits of long term investing were outlined in the previous Cuffelinks article in this series. Long term investors have capacity to access a broader range of investment strategies, in part due to an absence of pressure to deliver short term outcomes. And they can exploit opportunities arising from the actions or aversions of the short term investors who often dominate markets. It all sounds good in theory. This article discusses why it is not so easy to do.

The distant future is hard to predict

While any investment is based on expectations about the future, both the challenge of forming a view and the potential implications of getting it wrong are compounded over longer terms.

Predictions about the distant future can be limited and of low confidence. Errors might simply result from poor analysis or bad forecasting. More decisively, the fundamentals may transform in ways that are hard to anticipate. ‘Regime shifts’ can occur in the underlying profitability of an industry or company, the economic environment, or market conditions. Financial history is littered with instances where supposedly durable features have been turned on their head. In the 1980s, markets were driven by inflation fears; interest rates were 15%-20%; PE ratios above 10 times were considered too expensive; Japan was the leading economy; there was no internet; and Australian media, building materials and gold companies were all highly prized. Banks were considered uninspiring, low-returning investments. All of this has changed. The people in charge also matter for how investments perform, and they too will change. The foundations underpinning any long term investment can shift and you don’t want to be on the wrong side.

The cost of getting it wrong

Incorrect expectations can have particularly weighty consequences when investing for the long term. Feedback mechanisms are hazy when expectations relate to a future that will not arrive any time soon. Long term investors who invest on false premises stand at risk of underperforming for a considerable period before the error is fully recognised.

Even once an error becomes apparent, extraction from the position can prove problematic. Often an underperforming investment will continue trading at seemingly low prices at which selling may seem unjustified, even though the initial rationale for the position has disappeared, i.e. it can turn into a ‘value trap’. Behavioural forces may come into play. The notion that we are ‘investing for the long run’ might become an excuse to avoid taking action. (This is one side of the ‘disposition effect’.) Further, many long term investments entail commitment. For instance, it can be difficult to trade out of unlisted, illiquid or opaque assets. And if their fundamentals are under pressure, a large haircut may be required to secure an exit. Basically, long term investors who make fundamental errors face the risk of getting ‘locked-in’ to underperforming positions. In contrast, short term investors more typically invest in a manner that facilitates turning over their positions, including the utilisation of stop-losses. They are less likely to get entrapped.

Staying the course

If a long term opportunity is correctly identified, exploiting it still relies on the commitment and fortitude to sustain the position. Long term investments might initially generate losses that persist for an uncomfortable period. Various forces could act to undermine commitment in such circumstances. Individuals who suffer doubt may be more susceptible to behavioural influences, such as the inclination to herd with the crowd. Fund managers can be placed under organisational pressures to address underperforming positions. Their investors could redeem funds; investment board support could crumble; or colleagues with a differing view may advocate for reversing the position. The managers themselves could get blamed for the underperformance, and replaced. The decision of whether to hold or fold on a difficult position can be tortured, and markets have a habit of creating maximum pressure to reverse course at exactly the wrong time.

Alignment issues within investment organisations

Investment organisations delegate decisions to ‘agents’ who may not be fully aligned with a long term approach. Investment staff could be operating on shorter horizons than their organisations, or the strategies they are supposed to pursue, as they are managing their own incentives or careers. Remuneration arrangements that are truly long term are rare in the fund management industry, where regular bonuses are paid. Staff may be concerned about promotion prospects, or their own value in the job market.

Many organisations such as superannuation funds outsource to external investment managers, and securing alignment can be tricky. The horizons of external managers are often limited because short term performance determines both the success of the organisation via the link to funds under management. A long term approach is hard to sustain when those making decisions are following a different agenda.

Avoiding the pitfalls

Long term investing must meet the challenge of dealing with long term uncertainty. As any forecast will likely be wrong, the aim is to build robustness into decisions. Three approaches include:

  • Invest with a ‘margin of safety’ between the price paid and estimated long term value
  • Evaluate investments against a wider range of scenarios
  • Continually test the long term foundations for a position and don’t just set and forget.

A further suggestion is to favour positions that arise from the actions of short term investors in the first place. Long term investing is likely to work because the long term is undervalued in the markets, and not because it is easy. When an opportunity can be traced back to the actions of short term investors – such as the presence of forced sellers or buyers, or reactions to transitory influences – then a long term investor might take comfort that they are on to something.

 

Geoff Warren is Research Director at the Centre for International Finance and Regulation (CIFR). This article is for general information purposes and readers should seek independent advice about their personal circumstances.

CIFR recently collaborated with the Future Fund on a research project examining long term investing from an institutional investor perspective. This series of Cuffelinks articles aims to bring out the key messages for a broader audience. The (lengthy) full report, which comprises three papers, can be found at: http://www.cifr.edu.au/project/T003.aspx

 


 

Leave a Comment:

RELATED ARTICLES

Investing is like water, but what the hell is water?

The pros and cons of short-term versus long-term investing

Is this the real life or is this just fantasy?

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.