A Long-Term View Is Key

Market volatility has returned with a vengeance this year. With this being the case, I think it's the perfect time to revisit one of the core principles of value investing: investing with a long-term outlook.

Seth Klarman (Trades, Portfolio), the master of deep-value investing, has given plenty of guidance on how to invest for the long term, so I thought I would turn to some of his quotes for advice on the topic.

“Here’s how to know if you have the makeup to be an investor. How would you handle the following situation? Let’s say you own a Procter & Gamble (PG, Financial) in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you’re an investor. If you don’t, you’re not an investor, you’re a speculator, and you shouldn’t be in the stock market in the first place.”

I think this is probably one of the best quotes on long-term investing. Only invest money you can't afford to lose and, at the same time, be prepared for share prices to fall. If you cannot afford to lose or are not prepared to see the value of your investment cut in half and be willing to buy more, investing is not for you.

”‹“We are always long-term oriented. We never attempt to gauge near-term market movements; we have no edge there. We strive to make long-term investments that have truly compelling risk-reward characteristics. We are never afraid to stand apart from the crowd. We stick to our game plan and focus on areas where we are skilled and experienced. We are resolute in resisting the short-term performance pressures and herd behaviors that plague the investment business.”

One of the great things about technology is it has made the financial world increasingly short-term focused. For those who can look past the short term and invest with a long-term perspective, this is a huge advantage.

“…If someone asked me to invest their money with the goal of turning a quick profit over the next six or 12 months, I’d have no idea how…You might as well go to a casino…”

The problem is, predicting market movements and the short term is almost impossible. Predicting the direction of a business over the long term, however, is much easier. As Benjamin Graham once said: "In the short term the market is a voting machine, but over the long-term, it is a weighing machine."

“We’ve maintained a commonsensical, albeit increasingly unconventional approach to investing in that we strive to maintain a long-term perspective in a world of short-term actors, and we patiently hold cash in the absence of compelling opportunity, refusing to pull the trigger until the target is clear and compelling.”

And a final word from one of the best value investors of our time:

“Everybody these days is a just-in-time investor. People say, ‘I’m going to leave my money in the market as long as possible, and then pull it out of the market just before I have to write the tuition check.’ But I think we’re seeing that the day you need to pull it out of the market, the market might be down 50 percent. It’s critical not to be greedy. Avoid leverage and don’t invest money that you can’t stand to lose.”

Investing is not a precise science, it is an art and, as the quotes above show, trying to time the market is never going to work. With this being the case, trying to plan accurately for a life event by investing will always end badly. You can't predict or time the market. If you try to do so, you may end up being forced to sell at a loss, a situation no investor wants, but one that can easily be avoided by investing with a long-term outlook, not a short-term, just-in-time perspective.

Disclosure: The author owns no stocks mentioned.