[🆓post] Investment Process: The Short-Term Game Is Fun, but Don’t Ignore the Long Game

Turn your portfolio into an annuity

Let’s be honest — who doesn’t love making money in the short term?

When I was younger, that was a huge focus for me. Part of the reason for this was that I didn’t have a ton of money saved up when I made the choice to go all in on being a full-time investor back in 1994. And I had to make money to pay those bills.

Another reason was simply, ignorance.

However, luckily, I wasn’t just chasing momentum blindly — I still grounded my decisions in fundamental analysis, especially around growth inflection points in business performance.

I can only imagine what would’ve happened if my investment career started by chasing pump and dumps and story stocks. Although my dad would take risks in business and in his stock picking, he had a skeptical side to him.

I think just enough of that rubbed off on me to understand that some penny stock with zero revenue was not going to solve perpetual motion.

I’d try to buy undervalued stocks in the meat of the growth cycle, when fundamentals were accelerating, but before the crowd showed up.

I would sell a stock a quarter or two before I thought that growth in EPS was going to slow and/or when the valuation reflected what I thought the stock was worth within the next 12 to 18 months.

Short Term Investing Benefits

I liked this process because it gave me a clear discipline of went to buy or sell. As a young and somewhat naïve investor, I needed some sort of discipline because I knew my personality was naturally very undisciplined.

An ex-girlfriend used to say I had a bit of attention deficiency disorder. Whatever, let’s please get back to focusing on this article. 🤐

As a full-time investor, my short-term strategy worked well. It gave me liquidity and forced me to continually be in touch with the stocks I owned.

The success I was having with my strategy also showed me how powerful buying earnings-per-share growth at the right price can be. It also taught me that to have success in the short term, it’s not just good enough to identify great companies, but that inflection point investing can help you capture incredible short-term alpha.

Short Term Investing Cracks

The success I was having came at a cost: Since I was having so much success making money in the short term, I never even considered the benefits that a long-term strategy could bring. I would often just sell a stock and move on, never revisiting it again.

As the years rolled by, I started noticing that many of the stocks I sold became megabaggers.

Of course, many of them did not succeed, but I’m a half glass full investor and wanted to learn from the winners.

A good deal of this post-mortem reflection occurred after the 2008 global recession when microcap value investing went out of favor for an extended period of time. My short-term strategy wasn’t working consistently enough, because no one wanted to buy the stocks I was used to buying. (I talk more about why I felt the appetite for microcap value type based investing fell out of favor in this 2016 presentation I did in Toronto for Geoinvesting. You can see that , here).

By the way, there’s another hurdle to potentially deal with when applying the strategy I was using: Decision fatigue. You’re constantly recycling your portfolio, constantly managing new positions. At one time, I owned about 400 stocks.

A big risk when you take the approach I was taking is that you end up holding stocks that might have been primed for short-term performance, without understanding if they are going to be resilient enough to withstand a shock in the economy when the shit hits the fan, such as the 2008 recession or the 2022 inflation reset.

You might be stuck with a bunch of stocks that will no longer perform in your short-run window and end up taking massive losses by selling them. Or, you might sell stocks you should keep, that you sell because you didn’t understand the long-term resilience they might have.

Eventually, I knew I had to evolve.

Evolving

I began incorporating a longer-term strategy into my approach — being hyper focused on trying to understand business plans and long-term staying power. So, I began carving out a portion of my portfolio for companies that had strong long-term markers, even in some cases where I thought the short term performance wouldn’t be fantastic.

That transition wasn’t easy.

When you start “holding” companies, your portfolio gets less liquid (to pay bills), more boring, and potentially more uncertain.

It’s also mentally challenging when your long-term portfolio is under performing during hot market environments when speculative stuff is flying.

There are times where you’ll have to sit through execution pain, waiting for management teams to deliver or industry tailwinds to materialize.

But if you can endure that discomfort, there’s a payoff if you’re investing process leads you to owning good companies.

Eventually, great long-term portfolios hit their flywheel moment, similar to what Jim Collins talks about in his book, Good to Great, talkimg about what makes companies great, not just good.

That’s when the compounding kicks in… when a portfolio of great businesses marinates and starts hitting its stride, producing amazing alpha. Those megabaggers that we all wish for start consistently materializing. Then, guess what else happens?

All of a sudden, your portfolio becomes an annuity where it starts creating short-term income for you. You just have to make that 3 to 5 year sacrifice, waiting.

You actually start building wealth and become more comfortable during market pullbacks because you’ve done your homework to understand which companies you bought have long-term resilience.

You’ve probably also adjusted your portfolio weighting to have made bigger bets in those companies.

Don’t get me wrong — I still like having a blend of short- and long-term ideas in the mix. I think of it like offense and defense. But I’ve learned to embrace the uncertainty and boredom that comes with long-term investing, because that’s where some great transformational returns live. It’s been a key factor in my progression to becoming a better investor

And here’s the kicker:

Long-term investing often lets you buy really cheap stocks — at prices that seem “meh” to most people today, but will look insanely attractive once the business inflects. You just need to give the story time to unfold.

The short game feeds the day. The long game feeds the legacy.