Playing the waiting game: the case against short-termism

By Lucy Dean

October 31 2017
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Compounding is a "wonderful thing" so investors with short-term views could ultimately be short-changing themselves, an investment manager has warned.

The managing director at Hyperion Asset Management, Tim Samway has argued that investors need to break attitudes of "short-termism" as investment is more than a game of buy and sell.

"The problem is for most people... they feel like they need to be doing something," he said.

"They think that investing is a process of buying something and selling it when in fact investment really is holding onto an investment that you think is good and that you've determined is good and allowing that compound effect within that business to work."

Mr Samway said investors are increasingly demanding superior returns over all periods as a result of more bench-marking and this attitude is encouraged by regular reports on the performance of fund managers over monthly, quarterly or yearly periods.

He explained that brokers also have an incentive in short-term trading as "they get paid to trade" while analysts on the broking side regularly evaluate the performance of stocks over short periods of time before making mean reversion-type assumptions beyond the first or second year.

"It's just an easy way to do things and it doesn't accord any value to the long-term opportunities presented by certain companies.

"The next level is the fund managers who are being called the "bad dog" if they don't produce monthly or even yearly returns that are acceptable."

The final group impacted by short-termism are managing directors who may have their jobs in jeopardy if they fail to turn the business around within one or two years.

With higher market turnover and reduced capacity for compound interest are among the impacts of short-termism, Mr Samway said the "pressure" to perform to short-term benchmarks can be mitigated by a discerning ear in terms of market noise.

He explained that the first thing investors should do is remove noise from their inputs.

"There's an awful lot of information that's produced every day that is, effectively, not valuable and is just noise," he said. "One of the keys to successful funds management is determining what is noise and what is valuable."

The problem is, that's the hard part.

"That's the skill of a fund manager - being able to determine what's valuable... as opposed to - I'm reading everything and 90 per cent of it is not relevant for making an investment decision."

For mum-and-dad investors, Mr Samway warned that "reading the paper is a shocking thing to do under those circumstances" as according to him, "much of what you read on a day-to-day basis is noise".

For professional investors, they need to pay more attention to brokers who may have particular positions they want to push or a short-term view.

Mr Samway recommends investors can begin filtering out the noise by reading a year's worth of information on a company from multiple sources and then judging which source got it right in the end.

"Over 15 years, I've read multiple prognoses of the future of companies that we own ranging from 'This is a terrible company, it probably will go broke', to 'This is one of the best companies in the world' and they weren't both right."

Continuing, Mr Samway said investors should be wary of tangling themselves up by "trying to work out what the macro view of the world is" and should instead focus on companies that can build themselves over time.

He said: "You can go and pick companies that can build their businesses over time and that have a better chance of delivering a financial outcome for you as a bottom-up approach.

"That would be the approach we choose because if you can find businesses that can grow their earnings and therefore their long-term share price, somewhat independently of the underlying economies or even geopolitical events, you've got a much better chance of getting wealthy."

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