Reader Question: What is long-term investing?

A few weeks ago, I spoke to a fellow investor about a new company I added to my portfolio which they had already held for a few years with little joy. The share price is down fairly heavily over the last two years from a high of a little over £6 in 2018 to a recent low of £1.37, which is slightly under my buy price of £1.54. I was talking to my friend about the idea of it being a ‘set and forget stock’, with the fundamentals heading in the right direction and my hope that over the next three to five years the share price would recover. This brought us onto the topic of long-term investing and my strategy for it.

When considering investment themes, I start with trying to understand the direction of the global economy, accounting for historical context, geo-political themes, national demographics, and so on. Share prices are not perfectly linked to economies, but over time the fundamentals of a business usually mirror the underlying performance of a company. That performance can be determined by factors such as consumer tastes, government regulation, the number of customers available to sell to, competitive market forces, the buying power of consumers and so on (you can find a list of some of my preferred sources in this article).

The issues will remain broadly unchanged over weeks and months, but the course of decades can dramatically alter the fortunes of a company. Viewing companies over decaders is a cornerstone of long-term investing. Take, for example, a firm such as British American Tobacco, which sells cigarettes. For the last 50 years, most governments around the world have been doing their level best to reduce the consumption of tobacco. In the UK, indoor smoking in public places has been banned. Cigarette advertising has been dramatically constrained. Tobacco taxes have more than doubled. Anti-smoking campaigns have increased in prevalence. Consumers are increasingly aware of the dangers of smoking.

As these measures increased, British American Tobacco (not a company I hold or ever have) actually went up in price fairly consistently. In 2001, the company was priced at a little over £5 a share and topped out in 2017 at over £54 a share – a ten-fold increase. Many investors holding the company would have been patting themselves on the back for a fantastic return, but I wonder how many investors stayed invested after what happened next.

Each year legislative forces against tobacco have increased and consumers have increasingly moved away from tobacco. The customer base was in decline but as the company hiked prices further and further, revenues increased, masking the challenges facing the business.

Eventually, these forces must reconcile, and sure enough, since 2017 the company has been on a one-way decline, nearly halving to today’s price of £28 a share. To my mind, this ‘trend’ should have been obvious to anyone considering the long-term investing potential of the business. Over the short-term, perhaps even medium term, the price may continue to up, but eventually, society shifts its tastes and the company finds it increasingly challenging to do business.

To my mind, this issue perfectly highlights what long-term investing is all about. Over the course of weeks and months, there are hundreds of random movements in the stock market that produce substantial opportunities for investors, but over the course of decades, those opportunities are much harder to discern. Rather than getting caught up in the short-term noise of weekly and monthly – even annual – returns, investors should consider the long-term risks to their portfolios.

One long-term issue that concerns me is the level of global debt. If you’re a proponent of the idea that governments can keep printing money forever with no cost to society then I suggest you look at rising inequality levels, rapidly inflating asset bubbles (Tesla, Bitcoin etc.) and increasingly frayed levels of social cohesion (see public discourse around Brexit, COVID, Donald Trump etc.).

Another is the global decline of blue-collar jobs and the increasing inequality between the highly skilled and intelligent and the rest of us. I am a firm believer in a free-market economy and capitalism, but also opportunity for all. Without opportunity, individuals have no chance of bettering themselves and society. Historically, opportunity often came in the form of employment but that increasingly, employment is unable to provide individuals with secure and good quality housing, savings, and an ability to feed themselves.

On my own, I cannot make much of an impact on these issues, but I have to account for them when considering the long-term resilience of my portfolio. As such, I prefer companies that have strong social value credentials (fair pay, strong training and benefits packages for employees and a good track record of investing in the business to research and develop new products and technologies).

In addition, I constantly researching new themes and trends which I expect to accelerate positive change in society such as renewable energy, clean fuels, affordable housing, healthcare innovation, logistics and delivery, recycling, social support and care, education and environmental protections. Some of these themes are obvious, and consequently hugely overvalued as targets for long-term investing (for example, I suspect a huge number of investors will be disappointed with the returns on popular renewable energy investments over the next ten years, even if the underlying technologies and their companies continue to accelerate their prevalence).

I focus my investments on ideas which I hope will play out over decades to come and pay minimal attention to short-term noise whilst we get there. Financial and investment media (this blog included) is a constant treadmill of ideas and opinions but a long-term investor is one that is able to consume it without needing to act on it. I also try not to get too focused on an individual idea at the expense of all else.

For example, over the last few weeks, I have been watching interviews with a well-known private investor that occasionally provides their thoughts on companies they hold. Over the course of a few interviews, one company kept cropping up time and time again – the investor would mostly mention good news and over the years the price has steadily trundled upwards, reflecting increasing revenues, profits and a very healthy operating margin.

The company looks like the ideal investment; the perfect ‘set and forget’ type investment which I love. Scrolling through Twitter, I realised that this company was held by dozens of private investors – seemingly with good reason, as the company had great fundamentals.

The problem is that the company share price has increased almost 10x since 2014 but barely doubled its revenues (which were absolutely tiny to start with). What might have been a fantastic investment in 2014 now looks rather pricey – but still, private investors seem to pile into the stock, presuming that what happened over the last six years will happen over the next six.

To me, this is noise. I don’t really care what the share price has done over the last six years or that people are buying more of it – I care what it might do over the next six and from what I can see, there are dozens of private investors myopically focused on the historic income statements with little interest or knowledge of the underlying business and industry.

This is the antithesis of my investing approach and reflects my statement earlier in this article that some trends are overbought. Making an investment in a company valued at £20m on a P/E of 3 is not the same as making one when the company is valued at £200m on a P/E of 30.

Long-term, patient investors recognise this and can wait for years to buy at a good investment at a good price. At its core, long-term investing is more often about saying no to an investment than saying yes; it’s about patience and looking at trends over the course of years rather than months. I can look at Tesla increasing from $4 in 2010 to nearly $900 in 2021 and still not buy the idea that it’s anything more than an overbought cult stock. I like the concept but the execution isn’t there and as such, I see it as exactly the same as British American Tobacco (the market will eventually correct).

If I wanted to chance it, there’s lots of money to be made in these type of plays but it’s gambling, not investing. I have no way of knowing is Tesla’s all time high is tomorrow or in two years. I have no way of knowing if the company I buy at an all time high today will reverse tomorrow but unless the company dramatically changes its operational approach then eventually the price will come down.

As a long-term investor, I consider the fact that over ten years, Tesla might increase their production 100x over; perhaps they’ll develop a battery technology as ubiquitous as ‘Duracell’ or produce solar panels so popular that they’re on the roof of every home in the world by 2040 (much as nearly every household in the western world uses Amazon or eBay, or shops using a Visa or Mastercard). But the question then becomes how confident are you that that will happen? For every decades-in-the-making, world-changing trend company that came from nothing, there are hundreds of failed start-ups and loss-making competitors.

Long-term investors may look for long-term trends but that isn’t the same as long-term gambles.