Long-term vs. Short-term Investing
“In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”
Warren Buffett
We generally are value investors who buy individual stocks with a holding period of several years or more. However, we also execute option trades that last a few weeks to a few months. Warren Buffett’s quote seems apt in that rules for stock selection over the short term appear to differ from rules for long term investing.
There are multiple studies indicating that momentum strategies for stock selection are effective over periods of up to a year1. We will use momentum in its most simple sense to mean that you buy stocks that have been increasing in price recently and sell stocks that are going down in price.
There are other studies indicating that value strategies outperform over the long run2. Value here means inexpensive by some criteria, which suggests that the stock price has stagnated or declined at some point prior to purchase.
Do we employ different stock selection criteria based on the expected length of the holding period? If so, we might specify the key criteria for short term and long term holding periods:
Short-term holding (< 1 year)
Momentum investing
Technical analysis possibly useful
Valuations usually not too important
Most important determinants of investing success- Whether Wall Street “likes” the stock at the current time
Long-term holding (> 1 year)
Value investing
Fundamental analysis most important
Most important determinants of investing success- Company’s ability to develop a successful portfolio of products and grow revenues/profits
1- L. Pedersen (2015), Efficiently Inefficient.
2- J. Siegel (2015), Stocks for the Long Run, 5th edition.