In many ways, investing is forecasting. Investors buy (or sell) financial assets based on an expectation. After all, the profit lies in buying low today and selling higher tomorrow. What is sought is to estimate the demand in the future. Especially, what is sought is to estimate the growth of demand in the future in relation to the present. To achieve that, probabilities and trends are studied. For example, the macroeconomic environment, money supply, productivity, demographics and sentiment are weighed.
The long-term investor is one who, despite short-term volatility, is confident of continued economic growth over a longer time frame. The long-term investor is, deep down, a great optimist. This optimism means that growth is always accepted as the natural state of things and decrease is seen as a temporary delay. So for this individual, the best strategy is (always) to buy and wait. Because, sooner or later, prices will continue to rise. Sooner or later, market prices will be higher than our purchase price. The only solution is to wait. In other words, fortune favors patients.
Simple? Well, I’m afraid this explanation is too simple. That view is not wrong per se. However, this description requires certain clarifications. Because, usually, this whole long-term investment thing is presented in its most incomplete version. Many rely on the long-term investor narrative to justify his past misjudgment. This is often used as an excuse to hide that it was bought expensive and late in the cycle. Many institutions promise villas and castles to attract clients. They rely on bullish predictions to create false expectations. People then, due to FOMO, hand over their savings, underestimating the risks. Then the market crashes. The price falls. And the same ones who helped create false expectations now become cautious by talking about the benefits of investing in the long term.
The problem is that long-term investment is not the same for those who buy cheap as for those who buy expensive. Besides, andThis strategy is not the smartest for everyone and it is not the smartest at all times. I mean, it’s not a panacea. I will give some examples.
It is not very sensible, for example, for investors buying with debt or with many short-term commitments. As an example of what should not be done, we have the company Microstrategy and El Salvador de Bukele. Both actors arrived very late in the cycle and bought quite expensive. And both bought making extremely bullish predictions. Microstrategy issued debt to continue buying. And El Salvador bought with public money. With prices falling, both are now using the “long-term investor” excuse to hide that they were late and bought high with lousy risk management. Both are in the red right now. However, your debts are alive and kicking. And these creditors are not going to wait for recovery. They want your payment ready by the agreed date.
Now, let’s talk about another case. We are talking about a 93-year-old grandmother living on an income. In this case, suddenly, it is not very advisable to invest in very volatile assets with a long-term perspective. What this granny needs is a fixed income that arrives in a constant, stable, safe and predictable way. She can’t afford to wait 5 years, 10 years or 20 years to take a profit. She needs to collect at the end of the month. Because she eats every day. Therefore, she needs money every day.
Of course, there is also another exception to long-term investment. It could be said that one of these exceptional moments is at the beginning of a lost decade. What is a lost decade? The term “lost decade” in the context of financial markets refers to the possibility of taking (at least) ten years to reach the maximum of the last bull cycle again.
Suppose an investor bought a stock near the all-time high in 1929. Let’s say he paid $10 per share. During the crash, the share price fell to $6. And then it kept going down to the low of $4, several months after the crash. The unrealized losses of this hypothetical investor amounted to $6 per unit for many years. And he had to wait 10 years to get back to the $10 he started with. Suddenly, that purchase, at that price, at that time, did not go very well. That $10 would have yielded more, say, in the bond market than in the equity market.
Lost decades are not common. The length of a typical, average bear cycle is typically much shorter. Investors generally have to wait 2-3 years to recover from a down cycle. In some cases, the waiting time may even be shorter. Of course That does not imply that all bearish cycles will always last a maximum of 2 or 3 years. Of course it is a mistake to blindly assume that the purchase price and the time of purchase are not relevant to the long-term investor willing to wait 2 or 3 years.
The legendary Ray Dalio has said on several occasions that we are probably entering a lost decade. He is referring specifically to the period 2022-2032. This is said because of our macroeconomic situation. Debt is through the roof. Inflation got out of control. Populism, both on the right and on the left, is promoting a return to economic nationalism. The process of globalization is in danger due to internal and external tensions. But there are also logistical problems everywhere. In other words, there are many failures in the global production and distribution chains. That translates into supply problems.
Secondly, the population in developed countries is ageing. Y that has an impact on fiscal spending, on the labor market, on capital markets and on consumption patterns. Additionally, geopolitical tensions increase the military budget. Hence, tax spending. In conclusion, we have the perfect recipe for a stagflation crisis. Y stagflation is precisely what a lost decade needs to exist.
In short, the speech of “long-term investment” is not to be swallowed without chewing. The strategy itself has proven to be the best strategy of all. That’s true. However, within this strategy, we also have the smart long-term investor and we also have the dull long-term investor. The difference is that the intelligent investor knows how to buy at the best price at the best time. The clumsy and emotional investor, on the other hand, buys high and late, motivated by FOMO. Then, he justifies his losses (realized or not) with a wrong understanding of the concept of long-term investment. Is a “lost decade” coming to us?
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