Why Has It Gotten So Hard to Be a Long-Term Investor?
Investing used to be simple. All you needed to do was buy good companies, add to them over time, ignore the noise, and allow the laws of compounding to do the rest. Although none of those principles have stopped working, following them has gotten a lot harder.
Prediction markets, sports betting, and crypto have all exploded in popularity over just a few short years, and the ability to access such speculative bets has been lumped in right next to traditional financial instruments like stocks. When this sort of risk-taking behavior is normalized and deemed to be a sustainable long-term strategy, it inevitably begins to spill over into traditional financial markets.
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The result is a growing amount of capital being deployed based on what might happen to a stock over the next several hours rather than what might happen to the underlying business over the next several years. And that creates a lasting problem, even for those who have no interest in speculating.
Regardless of how long you intend to own a stock, everyone has to transact at the same price. This is the crux of the challenge facing long-term investors.
When speculators crowd into a stock all at once, causing its price to move by 5-10% in just one day, it will also pull a market-cap-weighted index along with it. And when enough money begins chasing the same handful of stocks, themes, or industries, it can skew the broader market picture altogether.
Whenever this happens, long-term investors must then decide whether to pay substantially more for the same stream of future earnings, wait for the stock to come back down, or abandon the idea altogether. Your original investment thesis may still be completely intact, but the investment opportunity is not.
Markets have always contained speculators, and stocks have always experienced periods of excessive optimism and pessimism. What feels different today is the speed at which those extremes can develop.
Consider, for example, the stock of Micron Technology, which has become one of the more visible beneficiaries of investor enthusiasm surrounding artificial intelligence (AI) and the enormous demand for memory used inside AI data centers. So far, Micron Technology has experienced more than 50 instances where the stock has moved more than 5% in just one day this year alone.
For someone who already owns the stock, several sharp moves higher within a short window is certainly welcome. But for someone attempting to build a position along the way, those moves can make dollar-cost averaging —one of the most basic principles of long-term investing—surprisingly difficult to execute.
The appeal of dollar-cost averaging is straightforward. Rather than trying to identify the perfect moment to buy a stock, divide the amount you intend to invest into several smaller purchases and spread them out over time. In doing so, you acknowledge not being able to reliably predict what a stock will do next.
A stock like Micron Technology can experience what feels like a year's worth of movement in several trading sessions. And when those movements are driven in part by investors operating on seemingly shorter time horizons, the long-term investor has no choice but to absorb the consequences.
That is why today’s market environment demands discipline more than ever. Defining in advance how much volatility you can stomach, how and when you will build a stake in a new position, and what evidence would cause you to exit becomes the ballast that keeps a sound plan from drifting into a series of knee-jerk reactions. Thus, the edge no longer lies in finding the next Micron Technology before it takes off. Rather, it lies in resisting the urge to treat every rally or stumble as an opportunity to rewrite your playbook.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
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