In this edition of Investing chronicles, Lockstep CEO Paul Farah dives into why a long-term investment strategy is crucial for building wealth in the stock market.

Investing with a long-term perspective is crucial for success in the stock market. Focusing on long-term investments can yield better results than placing short-term bets on where the market, industry, or a specific stock might be in the next month or two.

Here’s why:

1. Increased chance of success

Predicting short-term market movements is incredibly challenging. Even the Federal Reserve’s experts struggle to foresee where the economy is headed.

For instance, in early 2020, few economists or market analysts predicted the rapid and severe impact of the COVID-19 pandemic on the global economy and stock markets. Many expected a prolonged downturn, but the market rebounded quickly, reaching new highs by the end of the year.

Another example is the recent inflation surge in 2021-2022. The Federal Reserve initially predicted that inflation would be “transitory” and not persist long-term. However, inflation has proved stubborn, leading to “higher for longer” interest rates.

While we can’t predict short-term trends, we do know that the US economy tends to trend upward over the long term. High-quality companies see their revenues and profits grow, and as these financials improve, so do their share prices.

Need more proof?

Consider the S&P 500’s performance over the past 50 years. With dividends reinvested, it has returned an impressive 11.1% per annum. That means if you had invested just $1,000 fifty years ago, it would be worth approximately $193,000 today.

This growth hasn’t been a smooth ride – some years exceeded the 11% return, while others saw market declines. However, staying invested despite economic predictions, political events, and financial crises would have resulted in substantial gains.

If, instead, you had sold your investments during periods of uncertainty, waiting for the perfect time to reinvest, you would have surely missed out on the market’s gains and significantly underperformed the S&P 500.

2. Power of compounding returns

Compounding is often referred to as the eighth wonder of the world. It is an exponential force that accelerates the longer you allow it to work.

In the stock market, this means seeing your investment grow at an average of 11% per year. At this rate, your investment would double every seven years.

Investing for a year, withdrawing your money, and reinvesting later doesn’t have the same impact as a consistent, long-term investment strategy. Compounding is most effective when you remain invested over long periods, allowing your returns to generate more returns.

3. Benefitting from exceptional companies

“If you find three wonderful businesses in your life, you’ll get very rich.”
Warren Buffett

Buffett compares investing in businesses to baseball, where you don’t need to swing at every pitch. Instead, you wait for the perfect pitch – the ideal business – and when you find it, you swing hard. Investing in companies you believe are truly exceptional, run by honest people, and holding them for long periods, can make you very wealthy.

Buffett himself has made only a handful of exceptional investments, such as Coca-Cola, American Express, and Geico. These companies have been part of Buffett’s portfolio for decades and have been massive contributors to his compounding wealth. If he held them for only a few years, Buffett would not be the “Oracle” he is today.

In previous newsletters, I’ve discussed companies like the St. Joe Company and Innoviva. Both have fantastic potential, but it will take years to realise. I won’t benefit from their long-term growth if I invest for only a year or two. Instead, I must commit to being a shareholder for many years to reap the rewards.

Conclusion

Adopting a long-term mindset in investing is essential for achieving substantial returns and benefitting from the power of compounding. It also allows you to identify and invest in exceptional companies, setting you up for lasting financial success.

By staying the course and resisting the urge to make short-term moves, you can harness the full potential of your investments and build significant wealth over time.

There’s plenty more to discover with Lockstep. 
Head over to Lockstep to subscribe to Paul Farah’s weekly investing newsletter. It’s never been easier to gain valuable insights that you can apply to your investment journey and take your money game global.

DISCLAIMER
Paul Farah has worked in financial markets since 2006, holding positions at prestigious firms from New York to South Africa. Now, he manages his own money and provides access to his entire portfolio through his company Lockstep Investing. The views and opinions shared are his own and are for informational purposes only, they are not intended to serve as investment advice and do not represent the views or opinions of Standard Bank. This information should be used as a starting point for generating investment ideas, and should not be relied upon as the sole basis for making investment decisions. Lockstep Investing (PTY) LTD and the Standard Bank of South Africa Limited will not be responsible for the results of any investment decisions made based on the views provided.