From Morgan Housel at Collaborative Fund:
Young investors might have 40 years to save for retirement. But can they stay optimistic during a deep recession? Avoid chasing what’s done well in the last month? Can they leave their money alone to compound when they’re tempted to buy a boat?
You can buy a 10-year bond. Can you put up with a two-year rout? A fund manager might want to focus on the next decade. But can they survive investor redemptions after a bad year? Long-term focus is great. But the long run is just a collection of short runs that need to be managed.
It’s wrong and dangerous to assume you can ignore the short run because you have a long-time horizon. If you ignore something, you’re unprepared for it. When you’re unprepared for it, it will eventually take advantage of you. The beauty of a long-time horizon is capturing a compounding effect that others who quit before you forgo. But that works only when you’re keenly aware of, prepared for and managing for the kind of short-term stuff people with shorter-time horizons don’t want to deal with.
John Maynard Keynes is said to have put it like this: "A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware."
Speculators (with short time horizons) generally know how much endurance they need. Investors (with long-time horizons) often don’t because they wrongly assume their long-distance goals mean they can nap through day-to-day life. Yes, some people can respond calmly to day-to-day hassles. That’s the trick to long-term thinking. It’s not ignorance. Having the endurance to make long-time horizons work means your allocation, cash flow and mindset are designed to deal with the nonsense that occurs within short-time horizons.
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