Why you should prefer long term investment

While the future is unfolding at a gradual pace or so it seems, we wonder how fast we have traveled the distance since the beginning of 2008, when the skies above the stock markets were blue, and investors thought that the tree called stock markets could grow to touch the sky. It has never happened this way in the past. And the same holds true today as well.

As far as the corporate world is concerned, there has been a sea change in the attitude of companies and their respective managements. While not many of them (companies) were talking about any business concerns then (January 2008 and before), disclosures were flooding in those days - disclosures relating to hidden losses, pledged shares, cash that never was, cooked up books and many like these.

Another contrast can be seen in the behaviour of stock prices to bad news. While such ill doings were not given any air and were casually passed off in the heydays of 2008 and before, the period following the market decline set companies' stocks to plummet even on a hint of negative news.

One of Warren Buffett's famous quotes is - "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Imagine if that actually happened. And that too in the first week of January 2008! Most of us would have loved it considering that it was the peak of the bull-run.

Or to put things in a different perspective, imagine if there was a lock in period on every stock purchase - say, a five year lock-in period. A greater proportion of us would have been wiser in our stock picking methodology.
Coming back to the earlier point about the change in investors’ attitudes - with the occurrence of the slowdown, investors’ focus should have shifted on companies' long term performance rather than short-term performance. As such, the managements and their long term plans would be looked at with more detail.

We hope this brings about a change in investors' approach towards investing. Especially when the scenario is again uncertain with regards to the economy, making the need for long term investing and careful stock selection all the more pronounced. The lost art of carefully studying a stock before making the purchase, we believe, needs to make comeback. Understanding the nuances of profit and loss accounts, balance sheets, and cash flow statements has always been pertinent, more in recent times than ever before.

So, let's begin the journey to educate ourselves towards a fruitful investing experience. In a series of articles following this, we will try to bring to you the basics of investing by acting as guideposts to unraveling the mystery behind the financial statements.

While soft qualitative metrics like corporate governance and management quality will continue to be clouded under subjectivity, our effort will be to arm you with a better understanding of the ways companies can be researched.

Equitymaster.com

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