Who said investment mindset is just as important as strategy? Stan Druckenmiller, a billionaire and one of the most successful investors there is, was once asked about his investing style. He said that he invests in short-term stocks, but with a long-term mindset.
What does that mean?
My interpretation of what Druckenmiller is saying is that investing is less about the length of time we expect to own a stock than it is about way we think about the stock.
One way to think about stocks is as a bunch of ticker symbols that just rise and fall. If we base our buying and selling on nothing but the price movements, we are speculators.
Another line of thought is recognizing that owning a stock means owning a part of a business. If we base our investment decisions using this viewpoint, then we will buy and sell according to where the current share price is in relation to the business’ intrinsic value. This type of investor can be considered a long-term investor because even if you own the stock for a matter of months, the divide between price and value closed rapidly. This is how Warren Buffett thinks about stocks.
On the other hand, a decision can be short-term if a better opportunity comes along. That is why we should try to invest in the current most undervalued stocks. Of course, when there is market panic, our portfolio will have a high turnover rate since we will be switching overvalued stocks out with exceptionally undervalued stocks.
What separates the long-term investor from the short-term investor is that the long-term investor questions whether they would be okay with owning a business even if the stock exchange were to close and they could never sell.
Let’s think about it in these terms- if you were to purchase a farm, I do not believe you would do so with the goal of selling it the next week. Instead, you would want to think about how much the farm would produce and how much it could potentially earn over time. The same thinking should go into purchasing stocks. The intrinsic value of a company lies in how much income it is going to produce moving into the future. If we can begin thinking like the owner of a company, the better off we will be in the end.
Even if we are purposefully investing for the short-term, this thinking still applies. Even if we do not plan to own a stock for a long time, the best way to value a company is to understand the risks and potential earnings the stock may have for the long-term.
Warren Buffett said, ‘if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes’.
Holding on to a stock for the long-term is not all there is to being a good investor. What makes a good investor is focusing on the fundamentals and value of a company, not pure speculation. This is why I only ever trade fundamentally strong stocks, even if it’s only short term because it removes the risk of getting it really wrong which can be financially devastating.