1. One group of investors knowingly don’t bother to invest long term because they think it is too slow. The second group think that they are investing long term but they are actually not. I’ll label the former group ‘Knowingly’ and the second group ‘unknowingly’.
2. Let’s talk about the Knowingly group first. The instant gratification world and constant money race have caused many investors to focus short term. Some went to the stock market in a bid to change their lives or solve their money problems. This is a dangerous notion because it leads to risk-taking behaviour that often results in losses, deepening their money woes. That’s why one of the prudent investing mantra is to ‘only invest money you don’t need in the short term’.
3. But the stories of a few people getting rich quick are too good to be missed. It creates the Bannister Effect where they believe they could do it too, conflating luck with skill. The thing is that there are more unlucky investors than lucky investors, just that the unlucky ones do not make it to the news. Relying on luck alone offers poor odds.
4. Why invest long term when you can make loads of money short term? The thing is that what goes up fast in a short time, collapses quickly too. And it is almost impossible to know when something would collapse beforehand but the Knowingly group believes they could time it. Sometimes it could be volatility that drove the price down temporarily and subsequently the price rebounds. Witness it a few times and the Knowingly group thinks that good times will last, until it doesn’t.
5. When the crash is too deep or the drawdown becomes protracted, the Knowingly group would give up because the wait is too long, the loss too painful. They will leave the stock market and find another way to get rich quick.
6. The Unknowingly group thinks that they are investing long term but their thinking and behaviour say otherwise. For example, they will hop onto the hottest stocks at the moment, especially those with share prices that have done well recently.
7. They simply extrapolate the recent good results into the future instead of critically thinking about if growth is sustainable and identify the threats that would hinder such growth. Instead of looking for disconfirming evidence, they succumb to confirmation bias, looking for positive signs to justify their investments. They may also suffer from FOMO and would just want to buy at any price, disregarding valuation.
8. Although they tell themselves they are long-term investors, they check stock prices regularly and harbour the expectation that their investments are going to worth more next week and next month. They feel happy when the value goes up and sad when the prices go down.
9. When their investments drop 50%, they tell themselves they are still long-term investors but the feeling is different – deep down inside they felt regretful. They expect to hold onto profits long term, not hold onto losses long term.
10. Long-term thinking is extremely hard in today’s instant gratification world. Everyone else is showing his or her successes but not struggles. It is easy to get frustrated with the lack of progress and you want to accelerate your success. But the stock market doesn’t allow you to rush it. It decides where it wants to go. Your expectation is not going to change it but you can change your expectation.
