Why Long-Term Investing Is Profitable, But Not Always Easy (2024)

By Eric Fry

Most of the world's most successful investors describe their strategies as long-term processes. And yet most of us want our investment successes to occur right now.

Unfortunately, the expectation of immediate success can be a toxin. It can poison the opportunity for obtaining large, long-term gains.

If an investor is overly fixated on near-term gains and losses, that investor will lack the patience and staying power to allow an excellent investment to work its magic... over the long term.

Consider this real-world example of one well-known stock...

Let's call it "Stock X."

If you had purchased Stock X 30 years ago, you would have endured the following setbacks...

• 23% of the time, your stock would have produced an annual loss.
• 8% of the time, your stock would have produced a three-year loss.
• On one occasion during those 30 years, your stock would have spent an entire decade producing a loss.

Think about that! How would you feel about holding a stock for an entire decade without making one single penny on it?

If that stock had been Stock X, you might have been okay with that setback.

And The Mystery Stock Is...

Stock X is Berkshire Hathaway (BRK.A) (BRK.B), the investment vehicle that made Warren Buffett a multibillionaire... and made millionaires out of many ordinary investors...

Berkshire's extraordinary investment results would not have been possible without a long-term time horizon. As Buffett himself famously explained, "Our favorite holding period is forever."

Admittedly, "forever" is not the ideal holding period for every investment. But a well-constructed investment portfolio should include a handful of "forever investments."

That said, forever can be a very challenging holding period, even when you own a stock that is as exceptional as Berkshire Hathaway has been.

For example, if you had purchased Berkshire Hathaway 30 years ago and held that stock until the present moment, you would have endured numerous rough patches. Based on rolling 12-month calculations, Berkshire Hathaway produced a negative return 23% of the time.

But those uncomfortable one-year episodes would have seemed like a day at Disneyland compared to the nearly 11-year stretch from June 1998 to March 2009 when Berkshire Hathaway produced a negative return.

A decade is a very long time to wait for a payday. It's a very long time to spend wondering why you hadn't done something else with your money. Anything else.

And yet, during the last three decades, Berkshire Hathaway shares have delivered a staggeringly large return of 8,967%!

During the same time frame, the S&P 500 Index produced a total return of 1,800%. In other words, Berkshire Hathaway performed five times better than the S&P 500!

That's the magic of long-term investing...

Obviously, no one wants to endure a 10-year drought of zero returns. In fact, no one wants to spend any time at all losing money. But that's an unavoidable part of the investment process.

Even the Berkshire Hathaways of the financial markets will try the patience of investors from time to time on the way to delivering their market-trouncing gains. Successful investors understand this facet of the investment process. But they also understand the value of caution.

What To Do When Your Winners Are On Losing Streaks

In other words, while it's important to give your winning investments a long leash, it's also important to employ tactics that reduce risk and preserve capital. For example...

• Keep some powder dry for other outstanding opportunities, especially when the market is richly priced.
• Diversify into assets and sectors that do not usually correlate with the overall stock market.

In addition to these two widely accepted practices, many investors add one additional tool to their investment toolbox: stock options.

Options are a powerful tool. They can do things a stock simply cannot. And because of their unique attributes, options can boost portfolio returns while also reducing risk.

Importantly, many option strategies can produce gains even if the stock market is falling... or because the market is falling. That unique trait makes them an ideal accompaniment to forever investments.

But remember that the relationship between options and stocks is a marriage of opposites. So don't expect either one of them to behave like the other. That's a formula for disappointment and misguided decision-making.

Option strategies are not forever investments, they are wildflowers - potentially brilliant but fleeting.

Stock investments are not short-term trades, they are banyan trees - slow-growing but capable of spectacular growth.

They need time to flourish.

Disclosure: We expressly forbid our writers from having a financial interest in their own securities recommendations to readers. All of our employees and agents must wait 24 hours after online publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U