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The Advantage of Having (Lots of) Time in the Stock Market

I recently came across an article by investor John Huber in which he wrote about the three main advantages he thinks investors can have in the stock market. According to Huber, the three advantages are:

“1) Informational Advantage

2) Analytical Advantage

3) Time-horizon Advantage”

The first advantage is simply about finding information that others don’t possess or have easy access to. But, in the world of the internet and technology today, it is much easier to uncover information than in the past. This advantage has thus been weakened over time and is “the most competitive.”

Huber considers the best advantage investors can have to be the third one – the advantage of time. To Huber, long-term thinking in the stock market is a “structural advantage given the focus on short-term results.” He goes as far as to say that (emphasis is mine) “time arbitrage (being willing to think long-term when the majority of the market is focused on short-term) is a permanent advantage in markets.”

I can’t agree more with Huber on the importance of having a long time horizon when investing.

During the global financial crisis of 2007-2008, which was considered to be the worst crisis since the Great Depression of the 1930s, many wonderful companies were selling at wonderful prices.

Many market participants were dumping stocks likely due to emotional reasons and not due to business reasons, judging from the way how even companies with growing businesses in that period saw their stock prices get slashed over the short term. The mentality of the investors who were selling was likely to be “sell first, think later.”

But there’s another group of market participants – the patient investors. They were scooping up stocks that were sold by these distressed investors for cheap and have seen huge gains as a result. One such patient investor would be the billionaire Warren Buffett. In 2008, Buffett wrote an article for The New York Times (emphasis is mine):

“The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks…

…Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions.

But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Since the day Buffett wrote his article, US stocks have more than doubled in value. As a patient investor, Buffett focused on the long-term and used time arbitrage to his advantage.

No one can be sure when lucrative opportunities to purchase stocks will appear in a widespread manner (such as during the Great Financial Crisis). But time-horizon advantages can still be found even when the market’s not crashing – that’s why some Singapore stocks have delivered great long-term market-beating returns even if an investor were to have bought them right when the local market peaked prior to the Great Financial Crisis.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.