That’s a very good question.
An apparent problem with long term investing (As opposed to trading) is the long feedback loop. You can make a lot of money on the wrong bets over 4-5 years and come to the conclusion that that’s the best way to invest. Then over the next half a decade, you may pick similarly bad stocks and lose out on a lot of money. It can happen vice-versa too, even with ‘good’ stocks. You will learn the true lesson only at the end of ten years. Maybe more. That’s a cross we all have to bear.
In more complex terms, a feedback loop is called a ‘Mutual Causal Interaction’. There’s a short TED video about it:
Farnam Street has a longer article, in case you are interested:
So, for me:
- I currently think understanding companies within my Circle of Competence, assigning a value to them based on estimated future cash flows and purchasing at a good discount to that value will allow me to earn good returns over the long term.
- So like our earlier example, I will have to see how this works out over the period of 4-5 years. In the process, I will collect evidence for or against my methods. So, some parts of my method may change completely and some parts of my method may solidify.
- Then this new system, with new moving parts, will influence the way I understand, value and buy companies.
The circle goes on. Thankfully, forums like VP kind of speed up the lead time. I have known things about some companies here, which I wouldn’t be able to if I hadn’t been here. I have learnt valuable lessons which have had a positive impact on the way I invest. And yes, some opinions haven’t affected that process so much (Like the claim that I should only invest in ‘quality’ companies), largely because they have been anecdotal.
Another way in which I have been lucky is that I started nibbling at the market during the top of a bull market. I invested a lot during the past few months and if this can indeed be considered the bottom of a bear market, then I have also invested quite a bit during the bottom of the market. I was lucky enough to see both the extremes of the market within a matter of 1-2 years.
Personally, I have the benchmark of making at least 16-17% CAGR over the long term (Say, 10 years from now). If over the course of this, my feedback loop tells me that I’m not that good of an investor, I might start shifting more of my PF to Mutual Funds. If I am able to achieve that, I might continue.
In the end, maybe I will be proved wrong, or may be I won’t. But the important thing is, every single outcome will impact the way I think about investing and hopefully, for the better. This learning process excites me the most. Good returns or good money, if anything, will only be a bonus.