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Why You Need to Think in Generational Terms When Investing in the Stock Market

Warren Buffett is arguably one of the best investors in the world. From 1965 to 2017, he has generated annual returns of around 19% for his company’s shareholders. If you had invested just $1,000 in his firm, Berkshire Hathaway, in 1965, you would be sitting on a cool $8.9 million by 2017.

Buffett’s patience in the stock market is one of the key reasons for his incredible return. He is well-known for holding his stocks for the long-term. In fact, he once famously remarked that his favourite holding period in stocks is “forever”.

Yes, Buffett has sold shares often, but it is the thinking behind his quote that matters. If you have a long time horizon when investing, you will focus on the things that matter (hint: stock prices are not one of them) and will not bother with the things that don’t.

The following is another of Buffett’s well-known saying:

“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

It requires a considerable amount of time for any business to do well. By focusing on the long-term, we are forced to think about the quality and fundamentals of the company we are investing in. If we have an “investing” time frame of just one month, we would only be looking at stock price fluctuations alone, and this will be to the detriment of our portfolio. The daily fluctuation in stock prices will not do any good for our psychological health as well.

However, if our investing time frame is measured in decades or even generations, we will be forced to think about the things that matter: The long-term prospects of a business; the leaders behind a company; and the value of a business. As Foolish investors, we want to invest in companies that have products or services that will not become obsolete in the next few years – ideally, we want companies with businesses that can thrive.

Furthermore, when we invest for the long-term, the probability of us suffering losses will be much lower. This can be seen from the following chart that was compiled by my Foolish colleague, Chong Ser Jing:

Source: Ser Jing’s article here

As you can see, when you hold the Straits Times Index (SGX: ^STI) for a day, it’s 50/50 when it comes to your chance of making money – that’s no better than a coin flip. However, if your holding period is extended to two decades, the chances of losses go down to zero. Talk about long-term investing and its merits.

The next time you’re looking at a company to invest in, think in terms of years, decades, or generations, and not days, weeks, or months.

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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.