Legendary investor Howard Marks, Chairman of American investment firm Oaktree Capital has said: “If you don’t think you can hold a stock for five years, don’t even think about holding it for five minutes.” Even more legendary investor Warren Buffett made a similar quote, only his time frames were ten years and ten minutes. The time frames may vary but the point is the same.
Both investors were making a point about investing in quality businesses that will continue to be successful over time even while suffering periodic setbacks. Investing in a portfolio of successful businesses can make for a very satisfactory result. When shares of those businesses are publicly traded however, their prices will tend to be volatile and not always directly related to the performance of the underlying businesses. When stock markets go into their periodic swoons, few publicly traded stocks are spared from the decline in price. The same of course, also happens in reverse when, as the old saying goes, a rising tide lifts all boats. Markets will eventually get it right so a true investor will keep the eyes focused on the horizon and try to ignore the waves and troughs which must be traversed.
The trader on the other hand, seeks to profit from short-term variations in the price of a stock. This of course, is much harder to do consistently. Baseball fans will recognize the difference. After the Toronto Blue Jays made their much-publicized trades at the end of July this year, the fan could see that the quality of the team had improved significantly and that the probability for a successful season and making the playoffs was quite high. Predicting the outcome of the first game in August however, was more problematic. They lost to the Kansas City Royals 6-7. (As this is being written, the team’s improvement has indeed resulted in a playoff appearance and we, like most of the country, will be cheering them on in the post-season.)
The investor seeks to gain from the long-term success of the business of which shares are owned. A successful business will grow in value and create wealth for its owners for a long time. Investors who align themselves with the long-term success of a business are more likely to be successful themselves than those who rely on the win-lose proposition of the trader. Of course, this also assumes that shares of the business can be acquired at an attractive price. Overpaying for even a very high quality business will invariably result in disappointment for the purchaser.
We also do not mean to suggest that a holding should never be sold. There are several reasons that a holding might be sold, most frequently when shares of a comparable or superior business are available at a better price. However, when consideration is being given to any new share purchase, it should be considered with the expectation that it will be held for a significant period of time.
There is a second lesson to be gleaned from the above quotes. While both Marks and Buffett were alluding to the desirability of holding productive assets for a long time, it is also important to think about the next five years before deploying cash to any investment, regardless of its quality or its price. Since share prices are volatile and the future cannot be accurately predicted, funds to cover any foreseeable cash requirements over the next several years must be set aside to meet those requirements before considering a longerterm investment. While one may be confident that the price if a prospective purchase will be significantly higher in a few years, it is important to never be in a position where a share must be sold at an unattractive price in order to raise cash.