Not Following the Crowd

Dave Hutchison, CFA |

Amazon’s founder/former CEO/astronaut Jeff Bezos said the following in 2011:

“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.”

In my experience, the tendency of most investors is that they try and invest the way others around them are investing.  Which usually means operating with a short-term mindset – how will it do over the next 9 to 12 months?  What's the stock doing today?  This is hard to do – since many factors beyond company performance push around short-term prices.  And, as more people crowd into things, there is a risk of paying too much for an investment.  When this happens, your expected future return declines.

Longer-term changes in price are primarily driven by the performance of the business in my experience.  Growth in earnings, free cash flow are among the reasons for the long-term appreciation.  Investors might consider prioritizing this mentality in selecting both their investment ideas and the people they choose to advise them on investing.  And with the long-term road being far less crowded in my experience, the risk of overpaying is lessened.

Thinking and acting in a long-term manner is one of the few “free lunches” left in investing (along with appropriate diversification).  No cost, but with real benefits.  Just ask Jeff.