Long-term investing presents the only enduring competitive advantage that exists in financial markets. The reasons:
- A high percentage of long-term returns comes from a surprisingly few months. Since 1960, investors who were not invested in the SA equity market for 13% of those trading months, got zero returns over the 55 year period.
- The power of compounding. Small numbers get big. The SA equity market has delivered a real return of 8.7% per annum since 1925. In inflation adjusted returns this is 1343 times.
- The importance of avoiding negative returns. Studies have shown that managers that avoid losses, deliver the best returns in the long-term.
- Markets are becoming less efficient, not more. In this information overload age, one would expect a more efficiently priced market. This is true in pricing in the short-term prospects of assets. But in doing so, the long-term prospects are being ignored. In addition, passive investments (ETFs) become forced sellers and buyers to adjust market weightings, which tends to render markets less efficient.
In conclusion, if one believes markets misprice assets, one should expect periods of underperformance as long as the fund manager has a sound long-term records of good returns.
